Yuan depreciation risks competitive devaluation cycle-Mexico

The depreciation of the Chinese yuan risks triggering a cycle of competitive devaluation and is causing enormous worry in the world's financial markets, Mexican Finance Minister Luis Videgaray said on Thursday.

China allowed the biggest fall in the yuan in five months on Thursday, sending global markets down on concerns that China might be aiming for a devaluation to help its struggling exporters and that other countries could follow suit.

"This is one of the worst starts of the year for all the world's markets," Videgaray said at an event in Mexico City.

"There is a real worry that in the face of the slowing Chinese economy that the public policy response is to start a round of competitive devaluation," he said.

Mexico has been committed to a freely floating currency since a devastating financial crisis in the mid-1990s and authorities refrain from some of the more direct forms of intervention seen in other emerging markets.

Mexico's peso slumped to a record low on Thursday, triggering two auctions of US$200 million each by Mexico's central bank to support the currency.

The country's program of dollar auctions, under which the central bank can sell up to US$400 million a day, is set to expire on Jan. 29.

Videgaray said policymakers would announce if the plan would be maintained or modified before that deadline.

He noted the program's goal is not to defend a certain peso level but to ensure sufficient order and liquidity in the market.

"We have managed to achieve this objective in a satisfactory manner," he said. "Up until now, there has been no decision to modify the mechanism."