Why It Matters

Living with a weaker yuan

A man checking Chinese yuan bills in Beijing on July 28.
A man checking Chinese yuan bills in Beijing on July 28. PHOTO: AFP

There was an unmistakable air of alarm on Wednesday as the Singdollar fell to its weakest level against the greenback in more than five years while shares took their biggest one-day dive since 2011.

The trigger was the move by Chinese regulators to devalue the yuan. The first came on Tuesday, with China's central bank saying the devaluation was aimed at loosening its grip, giving the yuan a more market-determined exchange rate.

But the markets interpreted the move, together with Wednesday's second devaluation, as a sign that China needs a cheaper yuan to boost flagging exports and rev up a softening economy.

As a close trading partner of China's, Singapore has seen investors selling down the local currency and shares. The yuan itself dropped sharply to a four-year low against the US dollar on Wednesday, but has recovered some ground.

China's decision yesterday to devalue the yuan a third time, but only marginally, signalled that the regulators will ensure a controlled depreciation.

Furthermore, the country's central bank said yesterday that it will step in to control large fluctuations in the currency.

This so-called "managed devaluation" may also be designed to help China gain entry to the International Monetary Fund's Special Drawing Rights basket of currencies, which would bestow reserve currency status on the yuan, observers say.

While the lack of certainty could mean more turmoil ahead for Singapore, there is no need for all-out panic. The Monetary Authority of Singapore has said it stands ready to prevent excessive volatility in the Singdollar, which regained some ground against the US dollar yesterday. Local shares also rebounded a healthy 1 per cent.

Nonetheless, it would be prudent for consumers and investors to watch developments closely and get expert advice before making large purchases or investments.

A version of this article appeared in the print edition of The Straits Times on August 14, 2015, with the headline 'Living with a weaker yuan'. Subscribe