China devalues yuan to lowest rate against US dollar in almost three years

China’s central bank has devalued the yuan to its lowest rate against the US dollar in almost three years and its biggest one-day drop since 1994 when China aligned its official and market rates.

The lender cut its daily reference rate 1.9 percent calling the change “ a one-off depreciation”.

The move comes as policy makers stepped up efforts to support exporters on the back of data earlier this week which showed exports tumbled by 8.3 percent in July. The lender said its fixing will become more aligned with supply and demand.

“As a result of the strong yuan, because it is linked to the US dollar, Chinese exports have become very expensive. There was a study that in 10 years, China’s cost increased by eight and a half times, so China’s manufacturing cost is only marginally lower than the US,” said Francis Lun CEO, GEO Securities Limited

The move could help spur growth in the world’s second largest economy which is growing at its slowest rate for six years.

Some economists said the the devaluation was also designed to support Beijing’s push for the yuan to be included in a basket of reserve currencies known as Special Drawing Rights which are used by the International Monetary Fund to lend money to sovereign borrowers.

Read more: China devalues yuan to lowest rate against US dollar in almost three years | euronews, economy

G-20 seeks to allay fear of currency war - by Don Lee,

Top finance officials of the world's 20 largest economies sought Saturday to allay fear of a currency war, pledging not to target exchange rates to gain a competitive advantage in trade.

But the joint statement, issued at the end of a meeting in Moscow of the so-called Group of 20, or G-20, did not single out any country, essentially giving a pass to Japan to keep pursuing its economic policies despite a significant slide in the value of the yen since November.

Japan's new government under Prime Minister Shinzo Abe, who will meet with President Obama this week in Washington, had been talking down the yen and has pressed its central bank for more expansive monetary stimulus to break out of its deflationary trap and boost the nation's stagnant economy. A cheaper currency helps a country's exporters sell their goods to foreign markets.

Read more: G-20 seeks to allay fear of currency war - latimes.com

Time for a Fightback in the Currency Wars - by C. Fred Bergsten and Joseph E. Gagnon

The most overlooked cause of the economic weakness in the United States and Europe is what we call the "global currency wars." If all currency intervention were to cease, we estimate that the US trade deficit would fall by $150 billion to $300 billion, or 1 to 2 percent of gross domestic product. Between 1 million and 2 million jobs would be created. The euro area would gain by a lesser but still substantial amount. Countries that were engaged in intervention could offset the impact on their economies by expanding domestic demand.

China is by far the largest currency aggressor but has not been the major perpetrator of late. Three distinct groups are now involved. First are other Asian countries, including Japan, Singapore, Taiwan, Korea, Hong Kong, Thailand, and Malaysia. Second are major oil exporters including the United Arab Emirates, Russia, Norway, Saudi Arabia, Kuwait, and Algeria. Third are rich countries near to the euro area, most notably Switzerland but also Denmark and Israel. If Mitt Romney is elected US president, he will be able to label many countries as currency manipulators on his first day in the Oval Office, not just China, as he has promised.

These countries all exhibit rapidly growing levels of foreign currency reserves as well as significant current account surpluses. They buy US dollars and euros to suppress the value of their own currencies, keeping the price of their exports down and the cost of their imports up. Thus they subsidize exports and tax imports, enabling them to maintain or increase trade surpluses and pile up foreign exchange reserves. These tactics, in effect, export unemployment to the rest of the world. China has largely curtailed its currency aggression, at least for now, but many other countries remain highly active.

The currency wars started a decade ago and led to record trade imbalances. US and European policy makers tried to counter the effects and save jobs by encouraging a housing bubble. When the bubble popped, jobs disappeared. The US and Europe then adopted monetary and fiscal stimulus measures but prolonged financial deleveraging has offset much of their impact.

What can be done? The rules of both the International Monetary Fund and World Trade Organization forbid currency manipulation to maintain trade surpluses. These should be implemented at long last. Brazil has taken initiatives to this end and many other developing countries that run trade deficits, and lose from the currency wars, should join. The United States and the euro area should lead the effort. New bilateral and regional trade agreements, such as the Trans-Pacific Partnership, should include such rules.

If the preferred multilateral remedies continue to fail, revealing a huge gap in the international economic architecture, the aggrieved countries should act together to induce currency aggressors to mend their ways.

The most direct action would be countervailing currency intervention through which the US Federal Reserve and the European Central Bank buy foreign currencies to offset the exchange rate impact of others' aggression. Another option would be a surcharge on imports from currency aggressors, as adopted unilaterally by the United States in 1971. A third approach would be to impose a transactions tax or a withholding tax on US and European assets accumulated by the aggressors. Given the huge costs of currency aggression, such measures may become necessary to resolve this global systemic problem and allow recovery in the United States and Europe.

Read more: Op-ed: Time for a Fightback in the Currency War