China devalues currency for second day, sending markets spinning

China allowed the value of its currency to slip against the dollar for the second day in a row. The move makes Chinese products cheaper than those produced by other countries and is likely to fan tensions with the United States and Europe.
China allowed the value of its currency to slip against the dollar for the second day in a row. The move makes Chinese products cheaper than those produced by other countries and is likely to fan tensions with the United States and Europe. AP

For the second day in row, China’s central bank on Wednesday devalued the national currency, deepening suspicions that Beijing is manipulating the value of the yuan to boost exports and shore up a flagging economy.

The bank’s action triggered selloffs on Asian exchanges, with investors stunned by the largest two-day reduction in the yuan’s rate against the dollar in decades.

China has said it wants to “rebalance” its economy by relying less on cheap exports and more on domestic consumption. But the shift away from exports hasn’t been easy, financially or politically.

Last weekend, the government reported that China’s exports fell more than 8 percent in July, a blow to industries that employ tens of millions of people. That may have prompted the People’s Bank of China on Tuesday to devalue the yuan nearly 2 percent, a move that makes the nation’s exports more competitive by effectively dropping their price.

On Wednesday, the bank followed up that action by lowering the “official midpoint” for the yuan by 1.6 percent, to 6.3306 yuan for each U.S. dollar. The midpoint is a guiding rate, from which trade can rise or fall 2 percent each day.

China’s weakening of its currency has drawn a mixed reaction internationally, partly because the central bank announced the move Tuesday at the same time it pledged to make its currency more subject to market forces, which the U.S. treasury and International Monetary Fund have long sought.

The IMF, in a statement, lauded the bank’s announcement, saying it could lead to China having an “effectively floating exchange rate system” in two or three years.

“Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets,” the IMF said.

But U.S. congressional leaders in both parties have accused China of engaging in self-serving currency manipulation deserving of retaliation. U.S. manufacturers stand to lose if Chinese exports become cheaper, and companies that ship goods to China face higher prices and reduced demand for those goods.

“China has manipulated its currency for a long time. This is just the latest example, and it’s past the time to do something about it,” U.S. Sen. Chuck Grassley, a Republican from Iowa, in a statement Tuesday.

The People’s Bank of China attempted to assure markets on Wednesday that a continued weakening of the yuan is not likely. It described Tuesday’s action as a “one-off” devaluation that will be followed by attempts to make the exchange rate more variable, based on market forces.

“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the PBoC said in a statement.

Both investors and analysts see Beijing’s moves this week as a sign that China’s economy is weakening faster than expected. On Wednesday, the government released figures showing that industrial production in July had only risen 6 percent from the previous year. That rise was less than expected, and lower than a 6.8 percent increase the previous month.

Here in Chongqing, a city in southwest China that is a hub of the nation’s auto industry, there are serious concerns about a slump in sales. According to a report this week from the China Passenger Car Association, retail deliveries of cars nationwide fell 2.5 percent in July to a 17-month low. Dealership are rapidly cutting prices to draw in car buyers.

U.S. companies that sell goods to China are also getting hit by fears about China’s economy. U.S. stock indexes slumped Tuesday after news broke about the weakened yuan.

On Wednesday, Chinese stocks also dropped. In Hong Kong, the Hang Seng China Enterprises Index fell 2.6 percent, and the Shanghai Composite index lost 1 percent. Chinese airline stocks took a hit, apparently because of fears that the weaker yuan would trigger higher jet fuel prices.

Some analysts are starting to question Beijing’s commitment to “rebalancing” its economy, after letting the yuan appreciate over the last year.

“With the Chinese economy slowing, the central bank, or someone above its pay grade, lost their nerve and are instead trying to shore up China’s existing, failing growth model,” wrote Patrick Chovanec in Foreign Policy magazine on Tuesday. Chovanec, chief strategist at Silvercrest Asset Management, is an adjunct professor at Columbia University’s School of International and Public Affairs.

There’s also concern that China’s moves could prompt other Asian countries to devalue their currency, making it even harder for U.S. and European manufacturers to access the world’s fast growing markets.

The central bank’s weakening of the yuan “is likely to revive fears of a currency war,” said Arie Gozluklu, a currency expert at the Warwick Business School in England. He added it could also hurt Chinese efforts to make the yuan more of an international currency – one goal of the Asian Infrastructure Investment Bank, a Beijing-led effort to create an alternative to the World Bank.

Stuart Leavenworth: @sleavenworth