China devalues yuanby 2% to battle exports slump; currency hits 3-year low

China devalued the yuan on Tuesday after a run of poor economic data, guiding the currency to its lowest point in almost three years. The central bank described the move as a “one-off depreciation” of nearly 2 percent, based on a new way of managing the exchange rate that better reflected market forces. “Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations,” the bank said in a statement. “Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market.” [caption id=“attachment_2387184” align=“alignleft” width=“380”]  Reuters[/caption] China manages the exchange rate through an official midpoint, from which it can vary 2 percent each day, but in recent months volatility has vanished. Traders suspect the bank, along with major state-owned banks, had been propping up the yuan against depreciation pressure. The People’s Bank of China said it was now basing the midpoint on market makers’ quotes and the previous day’s closing price. It weakened the midpoint to 6.2298 per dollar on Tuesday, compared with Monday’s 6.1162 mid-point - the biggest-ever one-day adjustment to the midpoint. The spot yuan price touched its weakest point since September 2012 in early trade. At the weekend, China reported a surprisingly heavy fall in exports and a continuing slide in producer prices to a near six-year low in July. China’s strong yuan policy, partly designed to foster its use as an international currency, has hurt low-end export manufacturers. A 2 percent fall in the value of the yuan is a relatively huge move for China. Before today, the currency had been locked in an extremely narrow intraday range since March, with rates varying over a range of only 0.3 percent. One economist doubted Beijing was reacting just to the slump in July exports. “I don’t think this is a reaction to the weak trade data over the weekend, I think it’s because of the SDR,” said Zhou Hao of Commerzbank AG in Singapore, referring to China’s attempts for the yuan to be included in a basket of reserve currencies known as Special Drawing Rights (SDR), which are used by the IMF to lend money to sovereign borrowers. “They need to have a market-based mechanism and they need volatility.” The IMF published a report this month saying the institution should put off any move to add the yuan to its benchmark currency basket until after September 2016, and gave mixed reviews of Beijing’s progress making key financial reforms to its currency market. Reuters