Global markets feel aftershock of renminbi cut

 
Michael Bow
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INVESTORS fled into safe haven assets yesterday after the impact of China’s devaluation of the yuan continued to weigh on markets.

The decision by the People’s Bank of China (PBOC) to reduce the value of the currency sent Germany’s two-year yield on bonds to a new record low of minus 0.284 per cent as markets closed in London last night.

Ten-year US Treasury yields and UK gilt yields also fell to three-month lows of 2.09 per cent and 1.79 per cent respectively, as investors moved money into less risky asset classes.

Gold also rose for its fifth day in a row, gaining as much as 1.2 per cent to $1,121.40 an ounce before paring back later in the day.

The PBOC yesterday moved the yuan further against the dollar by setting its midpoint range lower than Tuesday’s closing price – a 1.6 per cent reduction – sending the currency to a four-year low against the dollar. The yuan was worth 6.4510 per US dollar after the move, its lowest since August 2011.

China surprised the world on Tuesday when it initially devalued the yuan by two per cent, sending shockwaves through financial markets across the globe.

Stock market indices across Europe tumbled again yesterday, with the FTSE 100 falling 1.4 per cent, the German Dax down by 3.3 per cent and France’s Cac off 3.4 per cent.

In the US, the S&P 500 finished 0.11 per cent down while the Dow closed down by 0.26 per cent.

The move has also impacted Asian currencies, with Malaysia’s ringgit and Indonesia’s rupiah falling to 17-year lows yesterday.

Why has China suddenly cut the value of its currency?

BEIJING has killed two birds with one stone with its decision to reduce the value of its currency, the yuan (also called the renminbi ­– the terms are interchangeable like pound and sterling). The country has been attempting to fix an exchange rate between the yuan and the US dollar. But the US dollar is currently very strong. It has risen in value by 18 per cent over the past year against a basket of currencies. While the US has been growing and investors there are expecting an interest rate hike from the Fed, helping to strengthen the currency, China has been slowing. The strong fixed-exchange rate has dented its growth, first by hampering its exports and then by restricting what it can do to boost its domestic economy. Aside from the exchange rate, China wants its currency to be a part of the basket of currencies used by the International Monetary Fund (IMF). But the IMF has said China’s financial sector is too heavily regulated and must move towards free markets – which includes allowing the yuan to float against other currencies. The IMF praised the move yesterday. “The new mechanism for determining the central parity of the renminbi announced by the PBC [People’s Bank of China] appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” the IMF said. The IMF will decide whether to include the yuan in November.