READ READ READ! CHINA DEVALUES YUAN

China’s central bank has devalued the yuan to its lowest rate against the US dollar in almost three years.
The lender said the move was a “one-off depreciation” of 1.9% in a move to make the exchange rate more market-oriented.
The move, which makes exports cheaper, comes after weak economic data from the world’s second largest economy.
Washington has in the past complained that China uses its currency for competitive advantage, but the US Treasury’s response was measured.
“While it is too early to judge the full implications of the change… China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,” a department statement said.
However, the statement added: “We will continue to monitor how these changes are implemented and continue to press China on the pace of its reforms, including additional measures to transition to a market-oriented exchange rate and its stated desire to move towards an economy that is more dependent on domestic demand, which is in China and America’s best interests. Any reversal in reforms would be a troubling development.”
However, one US politician, Senator Chuck Schumer, was more forthright. “For years, China has rigged the rules and played games with its currency. Rather than changing their ways, the Chinese government seems to be doubling down.”
Weak exports
At the weekend, China reported a sharp fall in exports and a slide in producer prices to a near six-year low in July.
Exports fell by 8.3% in July, far worse than expected and the producer price index was down 5.4% from a year earlier.
The midpoint for the yuan is now set at 6.2298 to $1, up from 6.1162 yuan on Monday.
The People’s Bank of China (POBC) manages the rate through the official midpoint, from which trade can rise or fall 2% on any given day.
Until now, it had been determined solely by the central bank itself.
Making the rate more market-based will mean the midpoint will now be based on overnight global market developments and how the currency finished the previous trading day.
Yuan bills
China wants to be included in the IMF’s reserve currencies basket
The POBC’s move comes amid speculation that China is preparing to widen the trading band for the currency from the current two percent range.
China has long kept tight control of the yuan value on concerns over financial volatility and losing its policy control.
Yet it is also under pressure to reform its currency policy as it pushes to become one of the International Monetary Fund’s “special drawing rights” (SDR) reserve currencies.
These are currencies which IMF members can use to make payments between themselves or to the Fund.
‘A new currency war?’
Analysts ask, though, whether this really is a one-time move from China.
“The question on everyone’s mind is whether this is the awakening of the dragon – ushering in a new global currency war?” Angus Nicholson, market analyst with trading firm IG wrote in a note.
“If this move ushers in a new era where the CNY [Chinese yuan] fixing is increasingly reflective of the spot market, it could be positive for its prospects being included in the IMF’s special drawing rights basket of currencies this year.”
Asian equities outside of China slipped on the news as investors weighed the implications of the surprise move.
line
Analysis: Robert Peston, BBC economics editor
The decision of the People’s Bank of China to devalue the yuan by 1.9% will have global ramifications, in the short, medium and long-ish term.
Immediately it will increase the competitiveness of China’s exports at a time when the country’s economy is growing at its slowest rate for six years – and when many economists fear that the slowdown will become much more painful and acute.
And for all the spur to growth it may give, the devaluation will reawaken concerns that Beijing is still a million miles from having re-engineered the Chinese economy to deliver more balanced growth based on stronger domestic consumer demand.

Why China is devaluing the yuan
By Karishma Vaswani
Asia Business Correspondent
11 August 2015
From the section Business
Chinese 100 Yuan banknotes are seen in this picture illustration taken in Beijing 11 July 2013
Analysts say China has other reasons for the devaluation besides stability
China says the decision to devalue its currency is all part of the plan to reform the way it manages its exchange rate.
In fact in its statement the central bank said that while the intention was to keep the yuan “basically stable”, market forces will be given a bigger role in the economy.
Analysts say that could indicate that there may be further devaluation of the currency ahead – although China says this is a one-off event to react to a “complex situation” which “is posing new challenges”.
So why is this important?
Well, Washington has been pressing Beijing to allow its currency to reflect what it thinks is its fair, higher value – the US argues that China keeps its exchange rate unfairly low so as to keep the price of its goods more affordable when they’re sold overseas.
But China watchers say there’s another reason behind the devaluation – and one that’s far closer to home.
Job protection
The Chinese currency has effectively strengthened against other Asian currencies in the last 12 months – by more than 10%. This makes Chinese goods more expensive abroad.
Employees work at a shoe factory workshop in Suining, Sichuan province, China, in this 29 October 2010 file picture
China is the largest exporter of goods in the world
Then came the shocker – this weekend’s export figures – showing that exports slumped by 8.3% from a year ago.
That’s worrying news for Chinese factories, which in turn provide jobs for millions of Chinese villagers.
Economists say the government may be trying to avoid job losses at these factories by weakening the yuan.
Joining the club?
The export story is just one part of it however. Analysts have also pointed to China’s longer-term goal of turning the yuan into a global reserve currency.
Later this year the International Monetary Fund (IMF) is expected to announce whether or not the Chinese yuan will be allowed into the elite currency club which includes the dollar, the euro, the pound and the yen.
In the past the IMF has said that China needs to have a flexible exchange rate, so that the value of the yuan adjusts to China’s growth – the way currencies do in other market-driven economies.
The devaluation could be seen as a step in the right direction, but one that may well be viewed with caution by China’s trade partners who are already wary of what they see as the Chinese government’s management of financial markets.