BEIJING, Aug. 11 (UPI) — China devalued its currency by 1.9 percent on Tuesday – a move that took financial markets by surprise and made the Chinese yuan more market-based.
The devaluation comes after Beijing released July trade numbers that indicated exports were down more than 8 percent compared to same period a year ago, CNBC reported.
Devaluing the currency would make Chinese exports more competitive but an analyst told The Wall Street Journal it is unlikely China would allow the yuan to drop further.
China’s central bank said in statement the markets would be permitted to play a larger role in setting a value for the currency – but Mitul Kotecha, head of foreign exchange and rates strategy at Barclays in Singapore said China may intervene if further devaluation takes place in the financial markets.
Still, the People’s Bank of China said the devaluation was to correct the previous inflation-adjusted exchange rate, which it said was too strong and “not entirely consistent with market expectations.”
The Wall Street Journal reported the central bank has $3.69 trillion in foreign-exchange holdings as of the end of the second quarter, but that figure is a decrease from a 2014 peak of $4 trillion.
China has been using its cash reserves to support the stability of the yuan.
The devaluation is not expected to result in improved competitiveness of China’s exports, according to Marc Chandler of Brown Brothers Harriman.
The impact of the devaluation was felt in U.S. commodity markets, with U.S. benchmark West Texas Intermediate crude down 2.5 percent, copper down 3.3. percent and aluminum down 2.5 percent.
The devaluation comes after a series of weak economic data was released and a July stock-market selloff resulted in suspended trading at the Shanghai stock exchange.
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