Why China is devaluing the yuan currency

The Chinese central bank devalued its national currency, the renminbi (mostly known as the yuan in the west) on Tuesday. It lowered the daily reference rate by 1.9 percent and triggered the biggest slide since 1994. The bank justified its approach in a statement as a further approximation to market economy mechanisms. It was said to have adjusted to the expectations of traders with the lower reference rate. The state press sold the move as a further component of the fiscal reform program.

But the timing of the devaluation in the middle of a period of weak Chinese export figures raises questions. With the devaluation of the yuan, the central bank is also resorting to a well-known antidote to falling exports. In July, the exports of the Chinese economy fell surprisingly significantly by more than eight percent and sparked new worries about the stability of the world's second largest economy after the USA. With a lower valuation of the currency, Beijing gives its exporters a competitive advantage over international competition. "We assume that the measure aims to take pressure off Chinese exports," said Shanghai economist Guo Lei.

Behind the devaluation, analysts see another warning signal for the state of the Chinese economy. Beijing has targeted seven percent growth for the current year, but the weak economic data suggest that this target will not be achieved. The accuracy of the statistics is doubted anyway because there is no transparent system for collecting data and the figures from the provinces were often tweaked in the past in order to meet or even exceed the expectations of the headquarters. The World Economic Institute in Kiel also recently found in a study that China's economy is cooling faster than the official data show. Even if the seven percent were to be reached, it would be the weakest growth in 25 years.

Beijing is in a quandary: On the one hand, the government promises more liberality in financial markets and capital flows. On the other hand, it feels compelled to keep the economy on course. With the sudden alignment to market expectations, which the central bank put forward as a justification, China is moving in the direction of its commitments. But whether it is actually just a "one-time adjustment" remains open. So far, the central bank has often acted against market expectations when setting the reference rate in order to keep currency fluctuations in check and better control the performance.