China rattled global financial markets by devaluing its currency in what it said was an effort to make its exchange rate more market-oriented. The yuan's value declined 1.9 percent on Tuesday, its biggest one-day drop in a decade, and dropped a further 1.6 percent on Wednesday. The move could help Chinese companies by making their products less expensive in global markets. U.S. stocks sank, partly on fears about a worsening economic slowdown in China.
WHY DID CHINA DEVALUE ITS CURRENCY?
The People's Bank of China said it acted because the yuan has been rising even when market forces say it should be falling. Worried Chinese have been moving money out of the country, putting downward pressure on the yuan. Yet the yuan has remained up anyway because of its link to the dollar, which has been rising. An overvalued yuan has hurt Chinese exporters by making their products more expensive overseas. In July, Chinese exports plunged 8.3 percent year over year. China's economy already needed help. The economy is expected to grow less than 7 percent this year, its slowest rate since 1990, and could decelerate even more next year. The stock market has been in a freefall since June.
With Tuesday’s move, the fixing will now be based on how the yuan closes in the previous trading session. As a result, the yuan’s fixing was weakened by 1.9% Tuesday from the previous day, leaving it at 6.2298 to the U.S. dollar, compared with 6.1162 on Monday. The yuan dropped as much as 1.99% from its previous close to 6.3360 against the dollar in Shanghai and fell as much as 2.3% in Hong Kong in early trading.