Chinese officials surprised the market by instituting a mini-devaluation of the yuan.  The 1.9% move was signaled by announcing the highest dollar fix in two years.  Officials indicated that this was a one-off move in response to the appreciation of the real exchange rate. At the same time, it injected CNY50 bln through a seven-day repo operation, which offset part of the CNY85 bln of maturing repo and bills. 

With the dollar appreciating against a broad range of currencies and the the yuan for all practical purposes, pegged against the greenback, of course, it appreciated on a trade-weighted basis. This move comes on the heels of weak exports and non-food prices. There are three orders of impact that investors are contemplating.  

First is the effect on the Chinese economy itself.   Given that the value-added in China of much of its  exports is still fairly limited to 20-33%, today's depreciation is unlikely to have a perceptible impact on the competitiveness of China's exports. In terms of China's financial conditions, the devaluation is likely to be reinforced with other easing measures, like a cut in required reserves or interest rates.  The gap reported today between new yuan loans in July (CNY1.48 trillion), and the aggregate financing (CNY718.8 bln) likely reflects the funds used to arrest the slide in equities.  

Although China's move was not telegraphed and is clearly in response to recent developments, it does not appear to be panicking or simply a move out of weakness. It is a vote of confidence in the ability of the financial market to absorb it. Also, it is not particularly concerned about rising the debt servicing costs of the numerous China's corporations who borrowed dollars.  

The second order of effect is on commodity markets. The depreciation of the yuan sparked a retreat in commodity prices. Losses are not very steep but are broadly felt, through the industrial metals and energy. Gold is about 0.8% higher.