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China allows yuan to fall for second day

China cut the value of the yuan against the dollar for a second consecutive day on Wednesday. The ripple effect could be felt around the globe.

Asian stocks and emerging currencies tumbled on Wednesday while commodities fell after China allowed the yuan to fall sharply for a second day.

On Wednesday, the People's Bank of China set its midpoint rate weaker than Tuesday's closing market rate, which had already fallen after China devalued its currency by two percent in a surprise move.

The daily fix that sets the value of the Chinese currency against the dollar was lowered to 6.3306 yuan, from 6.2298 on Tuesday, the People's Bank of China said in a statement.

Tuesday's devaluation - the biggest since 2005 when China unpegged the yuan from the dollar - raised worries over the health of the world's second-largest economy. Many Western firms have already been reporting slowing sales in China as its economy cooled.

Global repercussions

Equities, currencies and commodities came under heavy selling pressure as money managers weighed the implications of China's latest policy move. Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks around the world could rush to weaken their own currencies in response.

Chinese authorities maintain strict controls on the currency, allowing it to trade only within a two percent range of the daily reference rate. The practice is widely viewed as a way to help boost exports, making them more competitive as economic growth slows.

The central bank had billed Tuesday's move as a free-market reform but experts suspected it could be the beginning of a longer-term slide in the exchange rate to make China's ailing exports more competitive.

The move might also have strategic motives, as China has also been seeking to reform its yuan policy in an effort to have it included in the International Monetary Fund's basket of "special drawing rights" (SDR) reserve currencies.

ss/bw (Reuters, AFP)

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