China’s yuan slides in value after Beijing alters controls

China devalued its tightly controlled currency on Tuesday following a slump in trade, triggering the yuan’s biggest one-day decline in a decade. The central bank said the yuan’s 1.3 percent fall was due to a change aimed at making its exchange rate controls more market-oriented. But any change raises the risk of tensions with China’s trading partners.

The yuan has strengthened in recent months along with the dollar, making Chinese exports more expensive and raising the risk of politically dangerous job losses in industries that employ millions of workers. July exports fell by an unexpectedly large margin of 8.3 percent from a year earlier. The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set each day by the People’s Bank of China based on the previous day’s trading. On Tuesday, the center of the trading band was set 1.9 percent below Monday’s level in what the central bank said was a one-time move to reflect market conditions.

Tuesday’s change was the biggest one-day decline since Beijing ended the yuan’s direct link to the U.S. in July 2005 and switched to basing the exchange rate on a basket of foreign currencies. The composition of that basket is secret but the dollar appears to dominate it, which means the yuan has been rising even as the currencies of other developing countries fell. The United States and other governments complained for years that Beijing suppressed the yuan’s exchange rate, giving its exporters an unfair price advantage and hurting foreign competitors. Such arguments have diminished as the yuan’s value rose, but Washington and others still are pressing Beijing to allow the market to set its exchange rate.

“This complex situation is posing new challenges,” said a central bank statement. It said the yuan’s strong exchange rate is “not entirely consistent with market expectation” and therefore it was a good time to adjust controls to help development of the foreign exchange market. It promised to keep the exchange rate “basically stable” but said market forces would be given a bigger role, which left open the possibility of more declines in the yuan’s value.

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Source:Indianexpress