020 7898 0500Yesterday brought further dismay for China as the yuan fell 3% against sterling. The central bank’s decision to cut the reference rate by 1.9% triggered the largest one-day drop in two decades. The ripple was felt outside China as South Korea, Australia and South Africa saw their currencies drop by at least 1%. The decision to enforce the drop in the yuan’s value is a bid to increase the number of exports and stop the risk of deflation. However, sceptics have suggested that the weakening of the yuan could be detrimental with regards to debts the nation has. Now that the Chinese currency is valued lower it means that debts have increased in line with the currency depreciation, so it is a gamble to see whether the rise in exports can be surplus to the increase in debt. And now they have done it again by devaluing the yuan by 1.6% overnight.
China’s major release was positive today, new loans data clocking in over double of what was expected. Unfortunately this did not have a great effect on the market. Investors will be keeping an eye on this situation to see how it affects other major currencies in the long-run, such as sterling and the US dollar.
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