The People's Bank of China (PBOC) eased its hold on the closely controlled fixing by putting the rate at the weakest level in 14 years, causing the offshore yuan to drop to a new record low.
In foreign exchange trading, the currency fell as much as 0.6% to $7.3686 per dollar, a level not seen since offshore trading began in 2010. Beijing is allowing the yuan to weaken amid a rise in the dollar, as seen by the move, which came after the PBOC set its fixing at the lowest level since the global financial crisis.
With overseas-listed stocks in freefall, the offshore currency at a record low, and the domestic yuan threatening to shatter its closely-managed trading range, what was already a difficult year for China investors appears to be evolving into something far worse. A change in leadership that gives President Xi Jinping uncontested power runs the risk of reigniting the argument that the world's second-largest economy is unattractive to investors.
"The idiosyncratic risk is rising given the worsening expectation as well as concerns about capital outflows," Tommy Xie, head of greater China research at Oversea-Chinese Banking Corp said. "The fixing shows the PBOC is not using it to turn around the yuan depreciation."
In contrast to the Bank of Japan, which is stepping in to save the yen, the central bank is letting go of its hold on the yuan. Asian currencies are already under pressure from their expanding rate differential with the U.S. and losses in the yuan and yen are making things worse.
Around 90% of the 30 yuan dealers who replied to a survey last week anticipated the PBOC's decision to loosen its tight-ranged fixing following the party congress. Only 10% of respondents thought it would be around 7.25; the other half predicted that the yuan will be pushed to 7.4 or possibly 7.5 per dollar within the year.
Following the conclusion of the party congress, the yuan has already fallen below the crucial level of 7.3 to the dollar. A barometer of Hong Kong-listed Chinese stocks decreased, adding to Monday's 7.3% decline that sent the index to its lowest level since 2008.
China has taken a number of steps to curb the yuan's devaluation, but its impact has been modest. The central bank modified a guideline to make it simpler for businesses to seek finance abroad just before the PBOC issued its fixing on Tuesday, thus enabling additional capital inflows. In recent months, policymakers increased foreign exchange liquidity and raised the cost for traders to short the yuan via derivatives.
The onshore yuan is currently on track to experience its worst yearly depreciation since 1994.
