China Currency Falls for 2nd Day After Surprise Devaluation

China’s currency fell further Wednesday following a surprise change in its exchange rate mechanism that rattled global markets and threatens to fan trade tensions with the United States and Europe.

The central bank said the yuan’s 1.9 percent devaluation Tuesday against the U.S. dollar, which was its biggest one-day fall in a decade, was due to changes aimed at making the tightly controlled currency more market-oriented. That raised the prospect of still more declines, which would help struggling Chinese exporters at the expense of foreign competitors and might shore up flagging economic growth.

On Wednesday, the yuan dropped another 1.6 percent.

Until now, China has set the yuan’s value each day based on a basket of currencies that is believed to be dominated by the U.S. dollar. That meant the yuan rose as the dollar jumped over the past year, hurting its exporters and raising the threat of politically dangerous job losses. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier.

The People’s Bank of China promised Tuesday to keep the exchange rate “basically stable,” but Wednesday’s decline prompted suggestions the yuan is likely to fall further.

The yuan is likely to see “continued strong influence” from the central bank, with Tuesday’s change “probably marking the start of an engineered depreciation,” said Mizuho Bank in a report.

Many economists cautioned against seeing Beijing’s move mainly as an effort to benefit its exporters. They note that China’s currency, left to market forces alone, would have declined in value in recent months.

The depreciation “will not change the gloomy picture of global demand,” said Vincent Chan of Credit Suisse in a report. “The 2 percent devaluation cannot provide any meaningful help, but it caught the market by surprise.”

U.S. stocks tumbled Tuesday, with the Dow Jones industrial average closing down 212 points

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Sasha Perkins

Administrative Assistant and Journalist at the Pluto Daily since 2012.