China cuts renminbi rate in record currency devaluation

China has devalued its currency, the renminbi, by the largest amount on record to try and boost its slowing economy, with new reforms announced that will allow the currency rate more freedom to be moved by the market.

In a shock move, the central bank slashed the renminbi’s daily fixed rate to the dollar by 1.9% to 6.228, the most on record.

The People’s Bank of China (PBOC), whose previous biggest daily fix move this year was 0.16%, said in a statement that it would aim to keep the exchange rate at 6.2298 yuan per US dollar, down from 6.1162, and would try to allow the currency depreciate by 2%.

Although the fixing is said to be a one-off adjustment, the PBOC statement said the market will now play a bigger role in setting the currency rate, with a reform of the way it calculates the yuan midpoint, which will now be calculated based on market makers’ quotes and the previous day’s closing prices.

The move comes after China's weak export data release on Saturday, where exports fell by 8.3% in July.

Among currencies affected by the devaluation, the Aussie dollar was hit especially hard, tumbling to a low against the US dollar just above 0.7300.

At just before 0900 BST, the NZ dollar was down 0.98%, the Korean won down 1.03% and Taiwanese dollar down 1.40%, while the Dollar index bounced 0.3% on the news, with 10-year Treasury yields shrinking 3.2 basis points.

Devaluation is expected to act as a stimulus to Chinese exporters and would, said FXPro analyst Angus Campbell, "assist in injecting a little inflation domestically in the face of the continuing decline in commodity prices".

As a result of the US dollar's appreciation, natural resources stocks in Europe took a hit, with the Stoxx 600 Basic Resources index for the sector down 1% by 0900 BST. When the greenback appreciates, it makes dollar-denominated commodities more expensive for holders of other currencies.

Meanwhile, shares in other companies with significant exposure to China also took a hit, with luxury brands Burberry and LVMH both under pressure.

The market was certainly caught off guard, said Michael Hewson, chief market analyst at CMC Markets, which "put a brake on the rebound which seems rather counterintuitive given that it serves as merely another mechanism to stimulate its weak economy".

"we can probably expect similar easing measures in the coming days"

He added: "While the knee jerk reaction has been somewhat negative as the markets absorb what this move means given that most people had been expecting further triple R cuts or interest rate reductions, the fact remains the Chinese currency has gained sharply against the euro in particular in recent months."

Oanda analyst Craig Erlam said that devaluing the yen should support Chinese exporters at the expense of other exporting nations in the region, "so we can probably expect similar easing measures in the coming days".

He said the move will also now raise further questions about whether the US Federal Reserve can still seriously consider raising rates this year.

"The process of competitive devaluation among numerous countries that are easing monetary policy is effectively exporting deflation to those that aren’t, particularly those contemplating rate hikes. Any move by the Fed to now raise rates could strengthen the currency by more than previously expected. Whether that will be enough to encourage the Fed to delay such a hike isn’t clear but if they were not sure before, this certainly won’t help matters."

"central banks decisions could be complicated further if the IMF decides this year to include the Chinese yuan into its special drawing rights basket"

Looking forward, Jane Foley, senior currency strategist at Rabobank, pointed out that while another spate of currency wars will focus the minds of the central banks of the region, "their jobs could be complicated further if the IMF decides this year to include the Chinese yuan into its special drawing rights basket".

At the moment only the US dollar, euro, Japanese yen and sterling are included but the composition of the basket is reviewed every five years, with China having been pressuring the Fund to consider including the yuan from next year. A decision on whether the yuan will be included in the SDR basket is expected before year end.

"Last week the IMF proposed that if the CNY was included that the current basket would be extended for nine months to September 2016 to smooth the transition process - which could lead to additional demand for the currency."

In July, IMF chief Christine Lagarde defended China’s recent interventions in the stock market and stated that “no-one should be surprised by the fact that [the Chinese authorities] want to maintain an orderly movement”.