China’s second yuan bomb in two days caught a lot of people off guard

The PBOC is ripping up preconceptions and reconceptions.
The PBOC is ripping up preconceptions and reconceptions.
Image: REUTERS/Stringer
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It turns out that China’s major devaluation its currency yesterday (Aug. 11) wasn’t a one-time deal.

The People’s Bank of China dropped its exchange rate again this morning (Aug. 12) by another 1.9%, and everyone’s confused. As we explained yesterday, the move is partially a move to get in good with the International Monetary Fund. As the Financial Times’s Gavyn Davies notes, it also shows that China is adding the renminbi to its toolbox (paywall) as a way to manage its economy:

Other countries have found that the exchange rate is the most effective way of easing monetary conditions, and China is now signalling that the era in which it was the sole major exception to this general rule is over.

Meanwhile, markets are interpreting the move as evidence that China’s economic slowdown is worse than most people thought. Here’s how investors around the world are digesting the news (hint: poorly).

The S&P 500, down 1.1%

Germany’s DAX, down 3.3%

France’s CAC 40, down 3.7%

Hong Kong’s Hang Seng, which finished down 2.4%