Yuan makes its first market move
China's desire to be a world economic leader is legitimate, but too tight an embrace of global finance could kill the very stability that has marked the country's rapid ascent China sprung a surprise on world markets last week. The Chinese currency renminbi (less formally known as yuan) lost its value against the U.S. dollar by nearly 3 per cent between August 11 and 13. This was its sharpest weekly fall in over two decades. With the devaluation, China's manufactured products are going to get cheaper. In other words, with one U.S. dollar - whose value relative to renminbi increased from 6.2 to 6.4 following devaluation - you can now purchase more Chinese goods than before.
The devaluation announcement came within days of China's export figures for July recording a negative growth, owing mainly to the slow pickup in demand from developed-country markets. Naturally enough, one interpretation was that the devaluation was an attempt by the Chinese authorities to boost export demand for its manufactured goods. Some commentators argued that the Chinese action might trigger a new global currency war - where other countries too devalue their currencies to compete with China - as had happened during the Great Depression of the 1930s.
The People's Bank of China (PBOC), China's central bank, soon stepped in to clarify. It said that the devaluation marked the transition to a flexible, more market-based system of determining China's exchange rates. In contrast, the system that existed until now was one in which the value of the Chinese currency (especially in relation to the U.S. dollar) had largely been fixed by the government.
If PBOC's claims are true, it is likely to be a component of a larger, national strategy to internationalise the renminbi. China wants to see the renminbi emerge as a currency for international trade and finance, like the dollar. It also plans to build Shanghai into a global financial centre, rivalling New York. As a preliminary step, China is trying to get the renminbi included in the basket of currencies in International Monetary Fund (IMF)'s Special Drawing Rights (SDRs). The IMF has set a precondition that China should remove restrictions on foreign capital flows and shift to a flexible exchange rate system. Expectedly, the IMF welcomed PBOC's announcement. It is to be noted that China has had strict controls on foreign capital movements across its borders, at least until recently.