08/11/2015, 00.00
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Beijing surprise devaluation to boost exports

In the most important monetary policy move of the past 20 years, China set the yuan at 6.2298 against the dollar to protect the stock market. Consequently, the Singapore, Australia and South Korean currencies declined. The the purchasing power of middle-income consumers is also expected to drop.

Beijing (AsiaNews) - The People's Bank of China (PBOC) devalued the yuan on Tuesday, setting the daily mid-point yuan trading price at 6.2298 to the US dollar.

In what is the most important move in 20 years, China’s central bank said the move was a "one-off depreciation" of 1.9 per cent in order to let the currency soften after worsening economic data and a stuttering stock market.

With the US Federal Reserve poised to hike interest rates before the end of the year, the US dollar will only get stronger. This will boost trade China’s trade with the United States, which has suffered since the financial crisis of 2009.

According to Bloomberg, the PBOC cut its daily reference rate for the currency by a record 1.9 per cent, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994.

Although the change was a one-time adjustment, the central bank plans to make the rate more market-based with the midpoint now based on how the currency finished the previous trading day.

The goal is to deter capital outflows (especially in 2010 and 2011to Canada and the US) and boost exports. The latter show a decline that has lasted more than 15 months.

Middle-income consumers are more likely however to pay the price because imports will be more expensive. Food imports have increased in recent years following major food scandals.

Beijing's decision surprised investors and triggered declines in the Australian dollar, South Korea’s won and the Singapore dollar. Any currency war in East Asia could weaken the real economy.

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