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China currency devalues 4.4% in two days

Concerns over China’s financial situation continued this week as the country’s central bank pushed the value of the yuan (or renminbi) lower for three consecutive days. Moves by the People’s Bank of China, the country’s central bank, have caused the yuan to shed 4.4% of its value since Tuesday, the largest drop in decades.

China intervened in the currency market Wednesday in the final moments of trading, people familiar with the matter told The Wall Street Journal. The yuan had weakened by almost 2% – the government imposed daily limit – when the Chinese government ordered the banks to sell off dollars in order to bolster the currency.

Thursday, the Chinese central bank set the yuan at 6.4010 against the dollar, down 0.22% from Wednesday’s close and 1.1% weaker than Wednesday’s fixing. Traders pushed the yuan down further after markets opened to 6.4310.

“The not-so-secret weapon of the Chinese central bank is that it can order state banks to buy renminbi,” said Derek Scissors, a resident scholar at the American Enterprise Institute. “Once state entities start buying, the signal will deter many sellers.”

Allowing the currency to devalue was part of a push to make the Chinese currency more market-oriented, but allowing the yuan to plummet could have serious consequences.

The People’s Bank of China allows the currency to trade within a certain band, but restricts total market control over the currency to avoid massive capital outflows. If the yuan was allowed to go into free-fall, China might be accused of trying to start a trade war by rivals, and Chinese companies that hold their debt in dollars, would have a harder time paying back what they owe, reports The Wall Street Journal.

Zhang Xiaohui, an assistant governor at the central bank who became a member of its monetary policy committee in June, said that there was “no basis for the continued depreciation of the renminbi,” however. “From a long-term view, the renminbi remains a strong currency,” he said, adding, “in the future, the renminbi will be back on the appreciation track.”

China is still looking to maximize its strategic petroleum reserves

Despite continued concerns over the economic health of the world’s largest source of demand for oil, China will continue to buy crude oil as it looks to fill up its increasingly large strategic reserves, Virendra Chauhan told the Houston Chronicle.

“While devaluing the yuan will make dollar purchases more expensive, it’s important to place that move in the broader context of the drop in crude,” said the London-based energy analyst. “If you think about where we were trading last year, you’re talking about a 50% reduction in crude, and the currency impact is nowhere near that.”

More than 80 million barrels of new strategic reserve storage capacity is scheduled to start operations this year, according to Chauhan, and China will continuing purchasing crude oil to fill those tanks. Filling emergency inventories accounted for 49 million barrels of crude imports in the first half of this year, or about 268 MBOPD, according to Citigroup.

China’s purchasing continues to increase as well, with the country recording about 7.3 MMBOPD of imports in July and 7.2 MMBOPD in June, according to consumer data. “We see 7 million barrels a day being the new norm for Chinese imports,” said Chauhan.

The devaluation in the yuan is unlikely to change that trend, even if it does make purchasing dollar-priced crude more expensive. “I don’t think China’s SPR buying will be impacted by the change in China’s rates because oil prices are still very low and there is more than enough supply,” Ehsan Ul-Haq, a senior market consultant at KBC in London, said. “Before prices start rising, it is a good opportunity to fill strategic reserves.”


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