China’s devaluation of the yuan Tuesday surprised global markets and left analysts wondering what it might mean. Leaders in Beijing are probably asking themselves the same thing.
China’s monetary authorities cut the currency’s value against the dollar by 1.9%, the biggest move in years. Was this a liberalization of the country’s system for managing the yuan, a step to stimulate China’s flagging economy, or the beginning of a currency war? Mostly, it was a combination of the first two — but the question now is how authorities will strike this balance between pro-market reform and pro-export stimulus.
The central bank sets a rate for the yuan each day, and the currency is then allowed to vary plus or minus 2% from that figure. Market pressure, thanks to capital outflows and China’s slowing exports, has lately been pushing the currency lower in its permitted range. In cutting the “daily fix” by almost 2%, the central bank has accommodated the market’s preference for a cheaper yuan — and, in effect, that’s how the People’s Bank of China explained its action.
Moreover, it added vaguely, from now on the daily fix would take the previous day’s closing rate into account, suggesting a new and more market-oriented approach. That’s something outsiders, including the International Monetary Fund, have wanted to see. The IMF is in discussions with Beijing about including the yuan as part of its official international currency. Beijing wants the yuan to be part of the system as an affirmation of China’s standing in global economic governance.
Which is all very well. At the same time, though, this devaluation is a form of economic stimulus that promotes Chinese exports and makes imports from abroad more expensive — making this a suspiciously convenient moment for China’s leaders to recognize the merit of market forces. Later, when those forces point in the opposite direction — pulling the yuan up not down, and threatening to put Chinese exporters at a disadvantage — Beijing will face a dilemma. That will be a revealing moment. Outsiders can’t be sure what will happen, and China’s leaders probably don’t know either.
For now, China’s trading partners, also growing sluggishly, have to contend with a devaluation that’s less convenient for them than for Beijing. As things stand, they have no great cause for concern. The devaluation is big by Chinese standards, but hardly dramatic by the standards of countries with floating exchange rates.
US policy-makers, especially sensitive to Chinese manipulation of its currency, should also bear in mind that, in trade-weighted terms, the yuan has been strengthening lately. The rising dollar has pulled it higher against the yen, euro and other currencies. Tempting as it may be for campaigning politicians to deplore the opening of fresh economic hostilities, this is a long way short of currency war.
©2015 Bloomberg News