China’s Central Bank Devalues Yuan And Makes Currency Rate Reforms; Dollar Surges

ayThe U.S. dollar is surging higher on Tuesday following a decision by the People’s Bank of China to devalue the yuan by 1.9 percent from the previous day, a level not seen in nearly three years, amid fresh concerns that China’s economy is cooling faster than expected.

Over the week-end, new economic data from China in July showed that the country’s exports dropped 8.3 percent, producer prices fell to a 6 year low, and their producer price index fell 5.4 percent in July from a year ago.

China’s 2nd quarter 2015 GDP was 7 percent, matching its target growth level for 2015, but it still remains lower than 7.4 percent in 2014 or 7.7 percent in 2013.

The move to devalue China’s tightly controlled currency will act to cheapen Chinese exports across international markets and support China’s slumping manufacturing sector at least in the short-term but rising wage costs in China and weak global demand could still act as barriers to growth in the future.

Chinese authorities from the People’s Bank of China explained on Tuesday that the currency adjustment is accompanied with some exchange rate reforms to help facilitate more of a market focused orientation.

A spokesman from the People’s Bank of China (PBC) answered press questions on the new adjustments.

Here was the response:

Next, the reform of RMB exchange rate formation mechanism will continued to be pushed forward with a market orientation. Market will play a bigger role in exchange rate determination to facilitate the balancing of international payments. Foreign exchange market development will be accelerated and foreign exchange products will be enriched. In addition, the PBC will push forward the opening-up of the foreign exchange market, extending FX trading hours, introducing qualified foreign institutions and promoting the formation of a single exchange rate in both on-shore and off-shore markets. Based on the developing condition of foreign exchange market and the macroeconomic and financial environment, the PBC will enhance the flexibility of RMB exchange rate in both directions and keep the exchange rate basically stable at an adaptive and equilibrium level, enabling the market rate to play its role, retiring from the routine FX intervention, and improving the managed floating exchange rate regime based on market demand and supply.

Currently, under the complex international economic and financial condition, we are seeing increasingly large and volatile cross-border capital flow. As such, the PBC and SAFE will strengthen the examination of banks’ FX transactions according to relevant laws and regulations, adopt effective measures to fight money laundering, terrorist financing and tax evasion activities, and improve the monitoring of suspicious cross-border capital flow. The PBC and SAFE will severely punish illegal FX transactions, including underground banks, and maintain a compliant and orderly capital flow.

-Johnathan Schweitzer

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