The renminbi sank to a four year low against the dollar this morning after the People's Bank of China (PBOC) devalued the currency for the second day running.
The PBOC cut the daily fix by 1.6% today, the second largest ever one-day drop since yesterday's market-rattling record 1.9% slash. Bank officials said that the move on Tuesday was a 'one-off' and it revealed that is allow market forces to have more influence in setting the value of the currency in future.
The moves follow weak economic data which showed that Chinese exports fell 3.8% month-on-month in July.
Although the moves to devalue the renminbi could spark fresh concerns about competitive currency wars, GaveKal economist Arthur Kroeber is sanguine about the move.
'Ignore silly headlines about “currency wars”. We hold firm to the view that the currency move has nothing to do with cyclical economic management and everything to do with creating a more flexible exchange rate mechanism that will enable the renminbi’s admission into the IMF’s special drawing rights basket. 'A more flexible exchange rate is also a necessary step to push ahead the market-oriented reform agenda outlined by president Xi Jinping nearly two years ago—an agenda that in recent months has seemed in danger of stalling,' Kroeber said.
'In the medium to long term, it will be good for both China and the world for the renminbi to trade more freely. China accounts for 18% of global manufacturing exports, vies with the US for leadership in outbound direct investment, and is an increasingly important source of portfolio capital. Under these conditions it is senseless for China to cling to a currency whose value is determined by government fiat.
He added: 'From a domestic point of view, the exchange rate is one of the very few remaining controlled prices in the world’s second-largest economy. If the government is really serious about giving market forces “a decisive role” in resource allocation, as it pledged in its November 2013 reform roadmap, then the exchange rate has to be freed up.'