Reasons for CNY devaluation

Officially, CNY devaluation was a result of further currency liberalisation because the PBoC has adopted a market approach in setting the daily fixing rate. Effective from today, the fixing rate would be based on market makers' quotes and the previous day's closing price. 

Before, the PBoC's method of setting the fixing rate was considered a black box to the market. This explanation justifies today's fixing rate of 6.2298, which is more in line with yesterday's closing spot CNY rate of 6.2094. According to the PBoC, this was a "one-off correction" but the market is expected to have an adjustment period.

"Below the surface, it is suspected that there are other reasons for the devaluation, with growth concerns being the first and foremost motivation. Macro indicators for July have not delivered the good news that the government needs badly just weeks after a huge stock market crash", says Nordea Bank. 

The PMI disappointed with a reading of 47.8, with all important sub-indices falling across the board. Exports fell unexpectedly by 8.4% y/y in July and imports by 8.2%. Industrial production growth, due to be released tomorrow, is expected to plunge to a new low. The authorities have responded by pumping liquidity to the system. 

July new yuan loans reached 1.48 billion (CNY), double the size in June. With the devaluation move today, it seems that Beijing has adopted a "whatever it takes" approach to prevent growth falling too much below the 7% target for this year.