China’s devaluation of currency could have global repercussions

Associated Press

BEIJING

China’s surprise move Tuesday to devalue its currency has intensified concerns about a slowdown in the world’s second-largest economy, whose growth rate has reached a six-year low. It also is fanning tensions with the United States and Europe, whose exports could become comparatively costlier.

China’s central bank said the yuan’s devaluation was a result of reforms intended to make its exchange rate more market-based. The yuan is linked to the dollar, which has jumped in the past year. Tuesday’s move will mean the yuan will more fully reflect market fluctuations, Chinese officials say.

A close peg between the dollar and the yuan has hurt Chinese exporters by keeping their goods expensive overseas, thereby threatening jobs in key manufacturing industries. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier. A cheaper yuan will lower the prices of China’s exports.

“The move signals that [China] is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy,” said Eswar Prasad, an international economist at Cornell University.

Yet many economists cautioned against seeing Beijing’s move mainly as an effort to benefit its exporters at the expense of overseas competitors. They note that China’s currency, left to market forces alone, would have declined in value in recent months.

“It is a small step forward to accommodating market forces,” said Sung Won Sohn, an economics professor at the California State University’s Smith School of Business.

China’s currency move unnerved global investors. U.S. stocks tumbled Tuesday, with the Dow Jones industrial average closing down 212 points.

The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set by the People’s Bank of China based on the previous day’s trading.

The bank said that starting Tuesday, the daily target will be based on where the yuan closed the previous day, a change that gives market forces a bigger role in determining the currency’s level. The center of Tuesday’s trading band was set 1.9 percent below Monday’s level. The yuan quickly fell 1.3 percent against the dollar and was down 1.9 percent by afternoon.

China’s economic growth has slowed to an annual rate of just 7 percent – healthy for most countries but far below the double-digit pace it has enjoyed for decades.