The move could potentially have a negative impact on other markets of the world
It seems that China again came under the line of heavy fire as it was recently reported Yuan tumbled the most in the last four months as the country’s market reopened after a long week break. As reported by the Reuters, Yuan has dropped as low as 0.46 percent to 6.7 a dollar on Monday
The news has spread negative sentiments among the investors since the significant drop in the currency’s exchange rate marks the weakest since September 2010. Adding to that, the rate of onshore Yuan has slumped approximately 3.1 percent against the US dollar in this year, and plunged almost 7 percent against trade-weighted gauge. Subsequently, the offshore exchange rate of Yuan hit pretty hard as it scrambled by a similar magnitude during the holidays and was last trading at 6.7018. On Friday, the off-shore Yuan dropped to its lowest rate against US dollar since the start of this fiscal year. For the unfamiliar, Offshore Yuan trade usually in Hong Kong and it is not bound by the rigid restrictions set by the China’s Central Bank.
“The most important reason for this move is the strong rally in the US dollar,” said Liu Jian, an analyst from the Bank of Communications. “We saw the US dollar strengthen over the past four consecutive trading days.
Interestingly, investors long have been wary of China’s sneezes, knowing they could give the whole world a cold. For instance, China is amongst one of the largest exporter of commodities in the globe. Therefore, several speculations suggest that weaker Yuan will likely force export based economies to de-value their currencies. On the other hand, a fall in the rate of Yuan means a stronger US dollar which implies that this move will hurt the US manufacturers like Apple, that export their product to China by making their products much more expensive.
As per the report released by the Public Bank of China (PBOC) on Friday the foreign reserves of the country plunged to $3.166 trillion in September. It is worth mentioning that this is third consecutive decline that China experience in its foreign currency holding. Also, industry pundits believe that China is experiencing significant amount of capital-outflow pressure. In any case, If the regulating bodies of China wants to support the exchange rate of Yuan they may need to further spend their foreign reserves, however, this should be a very tough call to make.
It is worth noting that the information mentioned above is based solely on the speculations. Therefore, readers are advised use the information as a grain of salt. More concrete information is expected to reveal soon.