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Commodities markets have plummeted and fears over an Asia-wide currency war have mounted as China moved to devalue its currency on two successive days.

A 1.9% cut on Tuesday was followed by another drop of 1% on Wednesday, with the Ministry of Commerce claiming the People’s Bank of China (PBOC – China’s central bank) took the action in order to boost exports. However, there are fears that the bank was forced into action to mask concerns over an economy which is flagging more than was initially thought.

Exports and industrial activity were more subdued than anticipated in July, while the Chinese stock market has performed dismally for most of the year.

The currency has lost 4% of its value this week – the biggest drop in 20 years –  creating real concern among commodity producers that are reliant on China to offtake their exports. Copper and aluminium plunged to six-year lows overnight, with rubber and oil also crashing, leaving governments in the likes of Australia, Brazil and Canada watching anxiously from the sidelines, with their economies dangerously exposed.

Stock markets across the world saw their values plummet, as companies with significant business in China’s currency expressed concerns over their investments.

“This is not what a mature market would do,” Marc Vandiepenbeeck, corporate treasurer for Asia Pacific at manufacturing giant Johnson Controls told GTR. While most of his company’s transactional business in Rmb is hedged, Vandiepenbeeck admits there is some risk around its ability to convert its Rmb earnings from within China, with translation down 5% this week alone.

“It’s not good news, but hopefully it’s short-term. If it creates a positive impact in China, it offsets the downside. But we are a bit concerned that it won’t have the desired impact,” he adds.

With East Asian economies including Japan and South Korea embarking on currency devaluation programmes of their own, some have forecast a regional currency war, with neighbouring economies shaving increasing amounts off their currency value in order to make their exports more competitive.

The Japanese yen in particular has lost almost a quarter of its value since Shinzo Abe came to power late in 2012 with a mandate to boost the country’s sluggish export sector.

Analysts have speculated that for every 1% drop in the value of the Rmb, it will lead to a 1% rise in exports, since they are more affordable to overseas buyers. However, this potential impact would have a lag of up to a quarter year and it could be that the PBOC’s action is designed to offset the competitive advantage of regional rivals – a reactionary initiative, rather than an aggressive one.

“We think that the risk of competitive devaluations among other Asian currencies is limited,” Tom Rafferty, EIU

“In effect, it is playing ‘catch up’ with other currencies in the region that have weakened to a much greater extent. We therefore think that the risk of competitive devaluations among other Asian currencies is limited, although clearly it cannot be ruled out, particularly if the Rmb fails to stabilise at a suitable equilibrium level,” Tom Rafferty at the Economist Intelligence Unit tells GTR.

The PBOC has acted as the IMF prepares to decide whether the Rmb will be included in its special drawing rights (SDR) group of reserve currencies, along with the US dollar, British pound, the yen and the euro.

In fact, the IMF has spoken encouragingly of such action, saying it brings China’s currency into more market-oriented territory. A statement from the Washington-based fund said: “Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets.”

It’s a view shared by many financial analysts. Candy Ho, HSBC’s global head of Rmb business development tells GTR: “This one-off adjustment is consistent with China’s drive towards a more market-driven exchange rate mechanism. With the PBOC also signalling further foreign exchange reforms, such as the extension of the CNY trading hours and promoting convergence between the onshore and offshore exchange rates, it is clear that China is committed to making the Rmb fully convertible sooner rather than later.”

The sudden action, however, is contrary to what we’ve come to expect from the PBOC, as it seeks to manage China’s downturn. Earlier in the year, the Chinese Premier Li Keqiang told the Financial Times that currency devaluation was not on the agenda and that it “would lead to a currency war”.

Vandiepenbeeck at Johnson Controls – a company which has benefited hugely from the Rmb internationalisation programme – describes it as “brutal and sudden”, adjectives not normally associated with the assiduous central bank.

The overall effect has been to create more uncertainty among the trade community about the well-being of an economy that has become crucial to almost every market sector in the world.