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 Spot yuan in China dropped to as low as 6.4510 per dollar, its
weakest since August 2011, after the central bank set its daily
midpoint reference at 6.3306, even weaker than Tuesday's
devaluation.
The currency fared worse in international trade, touching 6.59.
The central bank, which had described the devaluation as a one-off
step to make the yuan <CNY=CFXS> more responsive to market forces,
sought to reassure financial markets on Wednesday that it was not
embarking on a steady depreciation.
The devaluation had sparked fears of a global currency war and
accusations that Beijing was unfairly supporting its exporters.
"Looking at the international and domestic economic situation,
currently there is no basis for a sustained depreciation trend for
the yuan," the People's Bank of China (PBOC) said.
Foreign exchange traders later said state-owned banks were selling
dollars on behalf of the PBOC, and the spot market ended at 6.3870,
after rallying strongly towards the close, which will influence
Thursday's midpoint.
"Apparently, the central bank does not want the yuan to run out of
control," said a trader at a European bank in Shanghai.
A trader at another European bank said the unexpected devaluation
had caused "some panic" in markets.
Analysts at BMI downgraded their year-end forecasts for the currency
to 6.83, down 10 percent from pre-devaluation levels.
The yuan has lost 3.5 percent in China in the last two days, and
around 4.8 percent in global markets.
Its slide pulled down other Asian currencies on Wednesday, with
Indonesia's rupiah <IDR=ID> and Malaysia's ringgit <MYR=> hitting
17-year lows, and the Australian <AUD=D4> and New Zealand dollars
<NZD=D4> touching six-year lows.
Indonesia's central bank pinned the rupiah's fall directly on the
yuan devaluation and said it would step into the foreign exchange
and bond markets to curb volatility.
POOR ECONOMIC DATA
Tuesday's devaluation, the biggest one-day fall since 1994, followed
a run of poor economic data and raised market suspicions that China
was embarking on a longer-term slide in the exchange rate that would
make Chinese exports cheaper.
Last weekend, data showed an 8.3 percent drop in exports in July and
that producer prices were well into their fourth year of deflation.
China's Ministry of Commerce acknowledged on Wednesday that the
depreciation would have a stimulative effect on exports.
Sources involved in the policy-making process said powerful voices
within government were pushing for the yuan to go still lower,
suggesting pressure for an overall devaluation of almost 10 percent.
Data on Wednesday underlined sluggish growth in the world's
second-largest economy. Factory output growth slipped to 6 percent
in July from a year earlier, missing market forecasts, while fixed
asset investment and retail sales were also lower than expected.
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There was also a jump in fiscal expenditure of 24.1 percent in July,
which reflects Beijing's efforts to stimulate economic activity.
PLAYING TO THE IMF?
The International Monetary Fund said China's move to make the yuan
more responsive to market forces appeared to be a welcome step and
that Beijing should aim for an effectively floating exchange rate
within two to three years.
Beijing has been lobbying the IMF to include the yuan in its basket
of reserve currencies known as Special Drawing Rights, which it uses
to lend to sovereign borrowers, a major step in terms of
international use of the yuan.
"Greater exchange rate flexibility is important for China as it
strives to give market forces a decisive role in the economy and is
rapidly integrating into global financial markets," an IMF
spokesperson said.
The devaluation was decried by U.S. lawmakers from both parties on
Tuesday as a grab for an unfair export advantage and could set the
stage for testy talks when Chinese President Xi Jinping visits
Washington next month, given acrimony over issues ranging from cyber
security to Beijing's territorial ambitions.
Not all countries consider the devaluation a threat, however.
Korea's Finance Minister Choi Kyung-hwan said it would be positive
for Korean exports to China, much of which were intermediate items
and not in direct competition with Chinese products.
While a weaker yuan will not cure all the ills of China's exporters,
it will help relieve deflationary pressure.
Falling commodity prices have been blamed for producer price
deflation, putting China at risk of repeating the deflationary cycle
that blighted Japan for decades.
Growth in China has slowed markedly this year and will hit a 25-year
low even if it meets its official 7 percent target.
Some economists believe China's economy is already growing only half
as fast as official data shows, or even less.
(Additional reporting by Samuel Shen in SHANGHAI and Jason Subler in
BEIJING; Writing by Will Waterman; Editing by Kim Coghill and Mike
Collett-White)
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