China devalues yuan for second day

Kim Hjelmgaard | USA TODAY

Show Caption Hide Caption Yuan tumble tests China's free-market resolve China has stepped up efforts to boost old growth drivers as new ones fail to offset slowing investment and trade, with the currency slumping after policy makers allowed markets a greater role in setting its value.

China further devalued its currency Wednesday as the world's second largest economy aggressively pushed back against slowing growth and trade, roiling global financial markets and driving expectations the currency could be set for more falls and even open a new currency war.

The People's Bank of China, or PBOC, its central bank, said in a statement that the daily reference or fixing rate for the yuan against the dollar stood at 1.6% Wednesday after it was cut by 1.9% Tuesday.

The yuan fell as much as 2% Wednesday against the dollar before paring losses.

Bloomberg, citing people familiar with the matter, reported that swift PBOC intervention to support the falling currency shortly before the market close in Shanghai on Wednesday helped to limit losses.

The yuan traded down about 1% against the dollar at 6.38.

Against the dollar, the yuan reached an all-time high of 8.73 in 1994 and record low of 1.53 in 1981, according to Trading Economics, a financial data website.

Tuesday's yuan devaluation was the largest against dollar in more than two decades.

A devalued yuan makes China's goods more affordable for foreign buyers and, conversely, foreign goods more expensive for Chinese consumers.

The sharp depreciation of the yuan could widen the United States' trade gap with China. That deficit was over $31 billion in June, according to the U.S. Census Bureau.

For all of 2015 so far, the gap was $170 billion in China's favor.

The U.S. has long accused Beijing of manipulating the yuan to keep exports cheap.

Presidential candidate Donald Trump, a long-time critic of China, weighed in on the matter in an interview with CNN on Tuesday. "They're just destroying us," the billionaire businessman said.

"They keep devaluing their currency until they get it right. They're doing a big cut in the yuan, and that's going to be devastating for us."

Markets in Asia and Europe fell sharply on the news and Wall Street was on track for a lower start. In China, the Shanghai composite index ended just over 1% lower. In Europe, Germany's DAX index declined 2.3%. Dow futures were off about 0.8%.

"The challenge for the PBOC is the market interpreted (the devaluations) as a signal that (Chinese) policymakers have embarked on a path of competitive devaluation with more moves to follow," analysts at Capital Economics wrote in a research note.

"Talk of a concerted policy effort to devalue the currency seems overplayed," they added.

Capital Economics expected Chinese policymakers to "act behind the scenes in the coming days, likely via (currency sales) to help stabilize expectations for the currency."

They said China is not declaring a currency war, which is when countries compete against each other to get a low exchange rate for their respective currencies to boost exports and competitiveness.

On Tuesday, Beijing said the devaluation would be a one-time event and was part of a drive to make the yuan more market-friendly, and less tightly controlled.

Mizuho Bank described Tuesday's devaluation as the "start of an engineered depreciation."