China devalues the yuan

China’s currency, the yuan renminbi, has seen its biggest fall since the current currency regime was introduced two decades ago.

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The yuan renminbi has seen steep falls

China's currency, the yuan renminbi, fell by 1.9% against the dollar on Tuesday, the biggest move since the current currency regime was introduced two decades ago, as the People's Bank of China (PBOC) devalued the currency. It slid by another 1.6% the next day.

The Chinese central bank has effectively been keeping the yuan pegged to the dollar, setting a fixed rate every day and allowing it to trade within 2% on either side of that rate. But on Tuesday it moved the fix by 1.9% and said in future that it would base the fix on the previous day's market rate rather than its own judgement. As a result, the yuan fell by a further 1.6% on Wednesday.

What the commentators said

On the other hand, continued Pratley, the Chinese economy may be even weaker than the official data, "which nobody trusts anyway". So the government may be trying to boost exporters through currency devaluation, making Chinese goods cheaper for overseas buyers.

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That could spark a currency war in the region. As emerging market currencies slide, exporting "waves of deflation to the West", said Albert Edwards of Societe Generale, they will overwhelm lacklustre developed world profitability, taking us back to "outright recession".

Don't panic yet, said James Mackintosh in the Financial Times. For one thing, the yuan has been very strong in the round: since last summer it has climbed by 20% against the euro and the yen; in real trade-weighted terms, it is up by 17% since early 2014. So you can see why the government wants to weaken it.

On the other hand, as far as a devaluation is concerned, a big one-off move of, say, 20%, would make more sense than a series of little steps.

For now, it seems Beijing is killing two birds with one stone. It's allowing market forces more influence over the currency, which, given weak recent data, "conveniently means a weaker" yuan.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.