The Korean stock market was buffeted hard by the Chinese government's decision to depreciate its currency as part of an effort to revive its slowing economy.
Amid a situation in which the governments of the European Union and Japan are doing the same in beggar-thy-neighbor policies, the Chinese government has set out to counter the moves. A weaker yuan is likely to add burdens to Korea's exporters while encouraging capital outflow from major emerging markets including Korea's.
On August 11, the KOSPI index closed down to the mid-1,990s after recovering to the 2,020 level in mid-session. At 1:44 pm, the KOSPI was traded at 1,997.05, down 0.31 percent from the previous day as foreigners and institutional investors began placing sell orders in droves. The market's turnaround to the downside was largely due to the announcement by the People's Bank of China that it would depreciate its currency against major currencies. The Chinese central bank posted the yuan-dollar exchange rate at 6,2298 yuan per dollar, up 1.86 percent from 6,1162 yuan on August 10. This is the largest fall in the yuan's value since the global financial crisis in 2008 when the value lost 0.7 percent in one day.
The People's Bank of China said in the notice, "The yuan's strength has been a burden to Chinese exporters" and added it would expand the flexibility of the yuan exchange rate further. Currently the Chinese government limits the range of variation in its exchange rate up to 2 percent. But analysts said the central bank may increase the limit to 3 percent given the current economic situation.
After the Chinese central bank's announcement, the won-dollar exchange rate gained by 20 won in the Seoul foreign exchange market. The exchange rate soared to a high of 1,177.40 won per dollar in the morning session, a record high in three years and two months, and fell slightly to 1,175.00 won. It is inevitable for Korean exporters to take the hit from the yuan's depreciation as it would make their export items more expensive vis-a-vis Chinese goods.
