China’s move to devalue currency could reverberate globally

China’s surprise move to devalue its currency Tuesday has intensified concerns about a slowdown in the world’s second-largest economy, whose growth rate has reached a six-year low. It is also 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 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 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.

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. The country’s leaders fear that growth below that pace will raise unemployment and lead to social unrest.

Still, China’s action Tuesday sparked complaints in Washington, where members of Congress have long complained that Beijing manipulates its currency to gain a trade advantage.

“For years, China has rigged the rules and played games with its currency,” said Sen. Chuck Schumer, D-N.Y. “Rather than changing their ways, the Chinese government seems to be doubling down.”

The move contrasts with action foreseen from the Federal Reserve, which is expected to boost short-term interest rates this year. A Fed rate hike would likely raise the value of the dollar, which has already jumped about 14 percent in 12 months against a basket of foreign currencies.

The rising dollar has hurt U.S. exporters by making their goods costlier abroad, and China’s move to devalue its currency could further complicate the Fed’s decision on when to raise rates.

This story was originally published August 11, 2015 at 4:57 PM with the headline "China’s move to devalue currency could reverberate globally."