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China devalues renminbi for second day

Tuesday saw the People’s Bank of China (PBC) lower the renminbi against the US dollar by 1.9% to 6.2298 yuan to the dollar as it looks to bolster the country’s slowing economic growth.

On Wednesday, the central bank lowered the renminbi’s daily midpoint down 1.6% to 6.3306 yuan against the dollar.

The bank has since tried to calm fears that this is the beginning of a long-running depreciation.

“In view of both domestic and international economic and financial condition, currently there is no basis for a persistent depreciation of renminbi,” the PBC said on Wednesday.

China registered a relatively rapid economic growth in the first half of 2015, facing complex and challenging environment both in China and abroad.

It added: “China’s GDP grew by 7% during the six months ending 30 June 2015, which is considerably higher than most other major economies.”

Turning tide

Andy Rothman, investment strategist at Matthews Asia, said he doesn’t think the moves were the beginning of a long dramatic devaluation against the dollar.

“It is still an economy driven by investment,” he said. “A quarter of GDP growth comes through consumption, and this is growing as it moves away from manufacturing and construction.

“I don’t think anyone is really sure what the central bank is doing here, but I’m confident China is not moving towards a free-flow market because it is still maintaining the exchange rate.

“The government is really focused on controlling the financial system, and there is a strong possibility that they are now ready to focus on a trade-weighted basket of currencies, and will strive to keep the exchange rate.”

Upheaval

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said the tide is turning in China.

“Chinese economy is rebalancing towards consumption, and away from industrial driven growth, as consumer spending grows,” she said. “However, this shift is happening much quicker than expected, and consumer spending has not yet reached the level needed to pick up the slack from subsiding growth in manufacturing and construction.

“As a result, economic slowdown is causing upheaval in the wider global economy, as well as global markets, hitting commodity demand and emerging markets hard.”

Curtin said the recent yuan devaluation is a reaction to increasing pressure to ensure the manufacturing slowdown isn’t too sharp.

“It won’t be a surprise to see further stimulus measures to restore confidence.”

tom@ybc.tv

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