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Yuan Recieves Government Assistance

Posted by Joseph Trevisani on Aug 11, 2015 3:11:00 PM

In a bid to prevent further deterioration in its economy and support its exports industries, China devalued its currency overnight sending markets worldwide into a tailspin. It was the latest in a series of moves by the Chinese government that underlined the deep problems facing the mainland economy.

The government in Beijing reduced the yuan's central reference rate against the dollar 1.9 percent catalyzing the largest one day drop in the yuan since 1994.

The People’s Bank of China (PBOC) said it was a one-time adjustment to the currency. It came after reports last week that showed Chinese exports fell 8.3 percent in dollar terms in July and wholesale prices dropped 5.4 percent in the month.

The yuan closed down 1.8 percent against the dollar in Shanghai at 6.3231.  It skidded 2.6 percent to 6.3790 in Hong Kong’s offshore trading, the largest discount to the onshore spot rate since 2011.

The PBOC allows the yuan to trade in Shanghai a maximum of 2 percent from its daily fixing, today set at 6.2298. 

The Chinese government has taken several steps to support the Shanghai stock market including reducing margin requirements, halting trading in many stocks and effectively banning short selling.

Beijing extended that attention to the general economy yesterday, boosting the amount of new loans to 1480 billion yuan in July almost double the forecast and this follows June’s 1279 billion yuan total, the biggest two month surge in new capital in in six years.

China's surprise devaluation roiled global markets, with the currencies of her trading competitors South Korea, Singapore, Malaysia and Taiwan falling at least 1 percent. 

In order to maintain the competitiveness of their exports other central bank are expected to follow the Chinese lead and take measures to reduce the value of their currencies.

The Australian Dollar had skidded 1.5 percent by the end of day as the devaluation of the yuan points to weaker Cheese demand for Australian raw materials.

The Bloomberg Commodity Index closed down 1.6 percent in New York on similar logic.

Worldwide commodity pricing is now suffering from an excess of supply, much of which was developed with an eye to the Chinese market, and waning demand as the global economy slows. Markets are also fearful that the problems on the mainland are understated by the official statistics.  

Equities around the world were hit hard. In Asia the Shanghai Shenzhen 300 and the Nikkei 225 fell 0.4 percent, the Shanghai Composite was flat.

Losses were greater in Europe with the U.K. FTSE down 1 percent, the German Dax off 2.7 percent and the French CAC 40 dropping 1.86 percent. In the U.S. the Dow lost 1.2 percent and the S&P 500 declined 1 percent. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 y 1

yuan fib aug 12

 

 

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