China’s credibility on line as currency slides

Global markets slump under second cut to the yuan, raising questions about its leadership.

beijing» China’s currency slid for a second day Wednesday, sending more shockwaves through global financial markets and raising fresh questions about the credibility of the country’s economic management.

The surprise moves by China to allow more market forces to set currency rates — an effective devaluation at the moment — has deepened speculation about the true strength of the world’s secondlargest economy after recent jolts including a stock market plunge.

The sense that the Communist Party was an almost infallible steward of the nation’s economy took a battering during the stock crash in June and July.

A few weeks later, China’s economic data — showing growth steady at 7 percent despite widespread signs of a slowdown — were widely derided by analysts as inaccurate and overblown.

Now, fresh concerns have surfaced about the stewardship of the central bank after a shock decision to allow market forces to play a greater role in setting exchange rates.

Over two days, China’s currency, known as the yuan or renminbi, was down 3.5 percent, sparking headlines about a global currency war and threatening to fan trade tensions with the U.S.

On Tuesday, China’s central bank said it would adjust the mechanism by which it sets the yuan’s central rate to give the market a greater role. The yuan can then trade 2 percent higher or lower than that central rate.

While experts said some of the criticism could be wide of the mark, the People’s Bank of China might now have a tough job on its hands to prevent the currency’s decline from spiraling.

China’s decision to free up its exchange rate appeared designed, experts said, to bolster the case for the yuan’s acceptance as a global reserve currency and specifically its inclusion in the Special Drawing Rights basket alongside the dollar, euro, yen and pound.

But the move probably was timed to support the nation’s slowing economy and critical export sector. Many economists agree the currency had become overvalued, and efforts to keep it stable had kept domestic interest rates higher and monetary policy tighter than economic conditions warranted.