China’s central bank devalued the renminbi by almost 2% Tuesday against the dollar — the biggest one-day move in 20 years. The currency sank 3%. Global stocks are shaking and countries are looking cautious at a potential currency war. Here’s what’s behind China’s bold move:
- The economy has been weak. Last month the Chinese government got very handsy with the stock market, but things still went south. Last weekend exports for the country dipped, and China is desperate to get growth back on track. The Telegraph
- Trading partners are out of line. The yuan is still tied closely to the dollar, despite being officially de-pegged in 2005. The yuan has been riding the dollar’s coattails this year, rising against other currencies that are China’s trading partners. Time
- China doesn’t want a trade war. Maybe. Devaluing the yuan helps put it in line with trading partners. China doesn’t want to weaken the currency to the point that the U.S. is calling the shots or that the global economy rolls over. Time will tell. Time
- Harmonizing with the market. China has been running its currency pretty randomly. Now it says that the daily fix will”refer to the closing rate of the interbank foreign exchange market on the previous day.” Financial Times
- China wants to be besties with the IMF. The IMF told China to keep working on reform and liberalizing its currency if it wants to be an IMF reserve currency. This could be a step in that direction. Financial Times
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