China weakened its currency for the second consecutive day on Wednesday, prompting concerns that the devaluation was not a “one-off,” as previously described by the country’s central bank, but rather the beginning of a prolonged slide in the yuan. On Tuesday, the People’s Bank of China cut the daily reference rate for the yuan by 1.9 percent—its biggest single-day drop in more than 20 years, and a drastic change from the narrow 0.3 percent band the yuan had traded in since March. The move was presumably intended to help prop up exports, and was characterized by the central bank as a necessary one-time adjustment for the market. But after the rate was cut again on Wednesday, the PBOC is bound to have a tougher time reassuring investors that the yuan won’t continue to decline sharply.
Here’s a bit more from Reuters:
The yuan has fallen almost 4 percent in two days since the central bank announced the devaluation on Tuesday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.
Their comments, which offer a rare insight into the argument going on behind the scenes in Beijing, suggest there is pressure for an overall devaluation of almost 10 percent.
“There have been internal calls for the exchange rate to be more flexible, or depreciated appropriately, to help stabilize external demand and growth,” said a senior economist at a government think-tank that advises policy-makers in Beijing.
Wall Street opened lower on Wednesday on fears of a global economic slowdown. The S&P 500, Dow Jones Industrial Average, and NASDAQ Composite were all down by more than 1 percent in morning trading. Beyond the simple fact of cuts to the yuan, markets are also worried by the mixed messages on monetary policy that China has sent over the past two days. When the PBOC first allowed the yuan to depreciate on Tuesday, it looked almost promising—a decision that could both boost China’s exports and signal the country’s intent to let its exchange rate be influenced more by the free market. The International Monetary Fund on Tuesday called the change a “welcome step,” adding, “greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy.”
China would dearly like the blessing of the IMF, which it is hoping will help secure the nation’s spot on the global economic stage by recognizing the yuan as a reserve currency. And so as trading began on Wednesday, the bank attempted to keep up its free-marketish signaling even as the yuan declined further, calling the volatility a “normal phenomenon” in a statement. But when that did little to assuage market turbulence, the government changed course by instructing state-owned Chinese banks in the final minutes of trading to sell dollars on its behalf, the Wall Street Journal reports. The immediate result? The yuan jumped slightly. What will bodies like the IMF make of the quick reversal? That’s tougher to say.