China’s decision to devalue its currency, the renminbi, by 2 percent against the dollar on Tuesday is intended to give its slowing economy a boost. But the decision is likely to be seen by lawmakers in the United States and elsewhere as currency manipulation to increase Chinese exports at the expense of producers in other countries.
A weaker currency benefits China by lowering the cost of its goods to consumers in foreign markets. In the last several decades, the country developed a thriving manufacturing industry in part by artificially suppressing the value of the renminbi. That policy hurt businesses and workers in the United States and other countries by reducing demand for their products. In 2005, China began to allow its currency to appreciate, and it has climbed about 30 percent against the dollar since then. One dollar now buys 6.33 renminbi, compared with 8.28 renminbi in July 2005.
The latest devaluation comes as concerns grow about the Chinese economy. The International Monetary Fund estimates that China’s growth rate will decline to 6.8 percent this year and 6.3 percent in 2016, down from 7.4 percent last year. exports fell 8.3 percent in July from the same period a year earlier. The country’s exports to Europe have declined particularly sharply partly because the euro has depreciated against the dollar, which the renminbi closely tracks, in the last year.
In announcing the devaluation, the Chinese central bank said it intended to allow market forces to play a larger role in setting its exchange rate. Officials set an official exchange rate every morning. Investors are allowed to bid up or bid down the currency by no more than 2 percent each day. But officials frequently do not fully take into account the prices at which investors were buying and selling the renminbi the day before. Now, the government says it will base its official rate more closely on trades in the market.
If the government is indeed ready to reduce its interference in the foreign exchange market that would be a good thing for the global economy. But it will not become clear how willing Chinese officials are to relax their tight grip over the renminbi until investors bid up the value of the currency when trading it in the market. Will officials allow the renminbi to appreciate against the dollar by, say, 2 percent from the day before if new data shows the Chinese economy is growing faster than expected?
Chinese officials would also like to persuade the I.M.F. to include the renminbi in a list of currencies that other countries can use as currency widely used in international trade”]reserve currencies[/tipso] and in transactions with the fund. Only four currencies now qualify to be on the list: the dollar, euro, pound and yen. The fund’s staff said in a report last week that the renminbi should not be added to the list right now because it is not widely used and traded in international transactions. The fund’s board is expected to decide in the coming months whether China has taken enough steps for its currency to be included.
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