The Chinese yuan sank to a five-year low as the People’s Bank of China set the onshore yuan midpoint rate at the weakest fixing since April 2011.
The People’s Bank of China set the yuan’s daily reference rate at 6.5314 per dollar, which was even weaker than Tuesday’s onshore closing price. After that, the onshore yuan dropped 0.6 percent to 6.5560 per dollar in Shanghai and offshore yuan dropped 1.1 percent to 6.7310 per dollar in Hong Kong, both are the weakest levels since March 2011.
This is the biggest drop for yuan since Aug.11 devaluation. The gap between offshore and onshore rate widens to as much as 2.5 percent, the biggest level since offshore trading started five years ago.
The widening gap between the onshore and offshore rate shows central bank’s strong intervention in the onshore market to prevent excessive volatility. But the intervention cannot last forever as the intervention cost rise. China kept intervening to stabilized the currency since the sharply devaluation in Aug last year. The central bank lowered the reference rate shows that they allow a depreciating currency.
"The spread between the onshore and offshore yuan has now reached some of the highest levels in the pair's history – a clear indication of both volatility and intervention," said Angus Nicholson, a market strategist at IG.
Economic growth slows may be another reason central bank allow a depreciating currency. A depreciating yuan may help the Chinese economy as it may boost the export, but it may not be a good thing for the rest of the world. Concerns about the continued deprecation of yuan increase, which lead to global stocks decline and commodities selloff this morning.