For the second-straight day, China has allowed its currency to take a sharp drop, sparking another round of falling stock prices internationally. The decision to devalue the yuan has shaken investors who fear a currency war and question the health of China’s economy, the second-largest in the world.
From Shanghai, NPR’s Frank Langfitt reports:
“Stocks were down from 1 to nearly 3 percent from Tokyo to Singapore. The sell-off came as the value of China’s currency fell nearly 4 percent in two days — the largest drop in the yuan in more than two decades.
“Investors worry that other countries will lower the value of their currencies to keep the price of their exports competitive with China’s.
“China’s government insists it has allowed the yuan to fall to align it more with real market forces, and not to prop up China’s falling exports, as some analysts suspect.
“China hopes a more flexible exchange will help convince the International Monetary fund to eventually endorse the yuan as a reserve currency.”
The effects of China’s new currency strategy are both wide and still developing. As NPR’s Maryilyn Geewax wrote for the Two-Way, the new policy caught many investors by surprise, sending prices of both stocks and commodities lower, along with interest rates.
“The two-day depreciation is the biggest since 2005 when China unpegged the yuan against the U.S. dollar and moved to the ‘managed float’ regime,” reports the South China Morning Post.
Seeking to ease concerns, the People’s Bank of China says the declines are part of an adjustment period for its new policy, and that there is “no basis” for a prolonged depreciation of the yuan.
The bank’s spokesman cited China’s 7 percent GDP growth in the first half of this year, along with a trade surplus worth $305 billion and deep foreign exchange reserves.