China surprised the world on Tuesday by devaluing its currency, in a move likely to boost Chinese exports and support the country’s flagging economic growth. The change to the currency’s value was the most dramatic one-day change in two decades.
The move is likely to stir intense concern, as political leaders, especially in the United States, have long complained that China leaves its currency at a lower value to boost its domestic industries.
Over the past decade, China has let the value of the currency, known as the yuan or renminbi, rise, but the announcement by China’s central bank Tuesday is sure to reignite debate over whether the country is giving an unfair advantage to its businesses.
Stephen Roach, a fellow at Yale University who formerly served as a non-executive chairman for Morgan Stanley in Asia, told Bloomberg that the move raised the “possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war.”
The Chinese economy slowed to 7 percent year-over-year growth in the first quarter, the slowest pace in six years. Exports plummeted 8.3 percent year-over-year in July, according to data released last weekend.
But the Chinese central bank argued on Tuesday that its goals were more mundane than spurring exports and growth. Rather, the bank said that the change was a one-time event to allow it to set exchange rates in line with free market practices. And in their initial responses, many analysts agreed.
Like many things in China’s economy, the country’s currency is controlled by a mix of market forces and government decree. Every morning, Beijing sets a target for the trading of its currency against the U.S. dollar, then allows investors to buy and sell the currency for 2 percent more or less. Tuesday’s change relaxes the government’s control over setting that rate, instead setting the midpoint around the market’s closing rate for the previous day.
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