The yuan, which is also known as the renminbi, saw its largest one-day fall in more than two decades as the People’s Bank of China (PBoC) decided to weaken the currency by almost 2 per cent against the US dollar.
Analysts took the surprise move as a signal that China’s policy-makers had become afraid of slower growth. Data released over the weekend showed that exports crumbled in July – falling by 3.8 per cent compared with the same month a year earlier.
With the move to devalue the yuan, China has entered the so-called “currency wars” arena with the aim of making its exporters more competitive.
The Telegraph reports that there are still fears that the country does not have the situation in hand unnerved investors across the world.
In the UK, the FTSE 100 dropped by close to 1.1 per cent, while across the Atlantic worries that global growth could be hamstrung contributed to a fall of more than 0.9 per cent in US stocks.
Commodities were also hit by concerns that China’s appetite for raw materials could be affected by lower growth. The same was true of luxury goods and car makers – both sectors which have benefited from the growth of China’s middle class.
The PBoC has also lowered interest rates four times since November to support the economy, which is expected to grow at around 7 per cent this year – the slowest expansion since 1990.
Amy Yuan Zhang, an economist at Nordea, said: “Beijing has adopted a ‘whatever it takes’ approach to prevent growth falling too much.”
Economists said that the PBoC’s move to devalue the yuan, described as a “one-off” by the central bank, could be the first in a series of interventions to drive the currency lower. Nick Lawson, of Deutsche Bank, said: “It was inevitable that China would join the currency war at some point.”
Citi expects that the currency will weaken by a further 4.2 per cent against the dollar over the next 12 months.
Analysts noted that Beijing’s move also took the yuan a step closer to inclusion in an “elite” club of reserve currencies, the International Monetary Fund’s Special Drawing Rights (SDR) basket. The fund is due to review the yuan’s potential inclusion in September 2016.
The SDR group includes four currencies – sterling, euro, the US dollar, and Japan’s yen – which can be loaned by the fund to countries in distress.
The decision to devalue the yuan “shows that the liberalisation and SDR inclusion is a high priority for China’s leaders”, said Sean Yokota, of SEB.
China is the second biggest source of imports to the UK, after Germany. UK imports from China have risen to 8.7 per cent of total goods imports in the year to June, up from just 4.6 per cent in the year to June 2005.