TWO phrases stand out amid the tumult generated by the People’s Bank of China’s renminbi devaluation.

One comes from the central bank itself. The near 2pc fall in the official guidance rate for the renminbi against the dollar was ‘a one-time correction’, it said.

The other comes from the market’s response to the move: ‘currency wars’.

Asian leaders fear the PBoC move will bring long-lasting effects on their region’s forex

For broader markets, China’s currency salvo stands to heighten volatility at a time of general uncertainty over global growth prospects as the US Federal Reserve prepares to lift borrowing costs.

If the market is more inclined to believe that a fresh wave of competitive currency depreciation has begun, it is hardly surprising, given the interventionist instincts of the PBoC.

The central bank dresses up the devaluation by extolling the virtues of free market reform.

But Adam Cole, head of G10 FX strategy at RBC Capital Markets, says going down the devaluation route raises questions about China’s commitment to such reforms. After all, he says, the bank still maintains a ‘vice-like grip’ on where the renminbi trades.

Simon Derrick at BNY Mellon sees ‘a significant step backwards’ for China’s claim to be moving towards a more market-oriented exchange rate.

Whether or not this is a currency war depends on whether you believe the devaluation really is a one-off event, Mr Cole says. “If it becomes a creeping, persistent devaluation, then yes — [currency wars] will come back on to policymakers’ agenda.”

Historically, the US has been the most vocal critic of China’s interventionist currency policy. But its complaints eased as the value of the renminbi strengthened, rising a third from 2005, when China abandoned the currency’s peg to the dollar, to the end of 2013.

Since then stability has been the watchword. With one eye on China’s campaign for the renminbi to be included in the basket of currencies given official reserve status by the International Monetary Fund, the PBoC has maintained a tight range in the dollar-renminbi pair.

But then China’s economy began slowing, casting doubt over the 2015 growth target of 7pc.

With the renminbi being dragged higher by an appreciating US dollar, China’s export machine has fared badly in a trade environment of many other countries pursuing weaker currencies.

Jane Foley at Rabobank notes that over the past 12 months the renminbi has become the second best performing emerging market currency, while the exchange rates of Japan and the eurozone have in effect dropped sharply.

That has created ‘an increasingly hostile environment’ for China’s exporters, she says.

Aroop Chatterjee, foreign exchange strategist at Barclays, says: “The macro backdrop is fairly weak, growth is on a medium-term decline and disinflationary pressures are in place.”

China’s devaluation does not change his view that the renminbi is overvalued by as much as 15pc.

So is further devaluation inevitable? Mr Derrick says this move has recouped only ‘a small amount of competitive edge’ that has been lost in recent years, while Steven Englander at Citigroup says most countries seeking growth through currency devaluation ‘move a lot more than 2pc’.

Any currency war needs reciprocal action. It is unlikely to come from the Fed because the impact on the US economy is so small, says Mr Cole.

But Asian policymakers may think differently. There could be ‘long-lasting effects’ on Asian foreign exchange markets, says Clifford Lau of investors Columbia Threadneedle, given the disappointment in the performance of Asian exports, the dollar’s strength and the impending lift-off in US interest rates.

According to Deutsche Bank, Japan is the country with the biggest renminbi weighting on its trade-weighted indices. For now the yen’s status as a haven is preventing it from being dragged down by the renminbi devaluation along with other Asian currencies. But that may change, if the PBoC’s assurances of a one-off devaluation prove incorrect.

Published in Dawn, Economic & Business, August 17th, 2015

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