Yuan set for biggest two-day drop since 1994 as China devalues again

A clerk counting yuan notes at a China Construction Bank branch in Jiangsu province.
A clerk counting yuan notes at a China Construction Bank branch in Jiangsu province. PHOTO: REUTERS

TAIPEI (REUTERS, BLOOMBERG) - The yuan was headed for its biggest two-day drop in 21 years after the People's Bank of China's reference rate was cut to the weakest level since 2012.

Spot yuan fell to 6.43 per US dollar on Wednesday (Aug 12), its weakest point since August 2011, following a 1.8 per cent slide on Tuesday, after the central bank set its daily midpoint reference even weaker than Tuesday's devaluation. The currency fared worse in offshore trade, touching 6.57.

The central bank on Wednesday lowered its daily fixing by 1.6 per cent to 6.3306, a 0.1 per cent discount to the previous closing level of 6.3231.

The PBOC said Tuesday that market-makers who submit prices for the reference rate will have to consider the previous day's closing spot rate, foreign-exchange demand and supply, as well as changes in major currency rates. Previous guidelines made no mention of those criteria.

The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation. "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 said in a statement.

Tuesday's devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate to help its exporters. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.

A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3 per cent drop in exports in July and that producer prices were well into their fourth year of deflation.

More indicators due on Wednesday for factory output, retail sales and fixed-asset investment are expected to underline sluggish growth in the world's second-largest economy.