China’s problems continue to mount and each day brings news of additional changes from within the world’s second largest economy.
The People's Bank of China depreciated the yuan by nearly 2 percent in early trading on Tuesday, moving towards its biggest daily drop ever, surpassing the number reached three years ago. The yuan was quoted at 6.3080 versus the dollar in early trade, falling from 6.2097 at the close on Monday. During the 2008 global financial crisis it fell 0.7 percent.
Chinese exports tumbled 8.3 percent in July, the biggest drop in four months and considerably worse than the 1 per cent predicted. Exports to the European Union fell 12.3 percent during the same period while those to the United States dropped 1.3 percent.
According to Sean Callow, senior currency strategist at Westpac, “It looks as though the weakened trade numbers were the last straw for China's tolerance of a strong exchange rate in the face of weak global demand for its exports."
Shock to World Currencies
World currency markets reacted in shock with Asian stocks slipping and sovereign bonds rallying on the news which seemed to point to an end to months of government yuan bolstering.
Investors reacted by selling the Australian dollar, which is often used as a surrogate for the Chinese currency. The Aussie AUD sank to $0.7325, from $0.7430.
"If the yuan is sliding then why not join in," Callow said, explaining the depreciation in other Asian currencies. "If China's a rival exporter, and all of a sudden it's allowing its currency to weaken, then you're more inclined to let your currency weaken."
