For the second consecutive day, China’s central bank on Wednesday devalued the national currency, deepening suspicions that Beijing is manipulating the value of the yuan in an attempt to boost exports and shore up a flagging economy.
The bank’s action triggered selloffs on Asian exchanges, with investors stunned by the largest two-day reduction in the yuan’s rate against the dollar in decades.
China has said it wants to “rebalance” its economy by relying less on cheap exports and more on domestic consumption. But the shift away from exports hasn’t been easy, financially or politically.
Last weekend, the government reported that China’s exports fell more than 8 percent in July, a blow to industries that employ tens of millions of people. That may have prompted the People’s Bank of China on Tuesday to devalue the yuan nearly 2 percent.
On Wednesday, the bank followed up that action by lowering the “official midpoint” for the yuan by 1.6 percent, to 6.3306 yuan for each U.S. dollar. The midpoint is a guiding rate, from which trade can rise or fall 2 percent each day.
China’s weakening of its currency has drawn a mixed reaction internationally, partly because the central bank announced the move Tuesday at the same time it pledged to make its currency more subject to market forces, which the U.S. Treasury and International Monetary Fund have long sought.
The IMF, in a statement, lauded the bank’s announcement, saying it could lead to China having an “effectively floating exchange rate system” in two or three years.
“Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets,” the IMF said.
But U.S. congressional leaders in both parties have accused China of engaging in self-serving currency manipulation deserving of retaliation.
“China has manipulated its currency for a long time. This is just the latest example, and it’s past the time to do something about it,” U.S. Sen. Chuck Grassley, a Republican from Iowa, in a statement Tuesday.
The People’s Bank of China attempted to assure markets on Wednesday that a continued weakening of the yuan is not likely. It described Tuesday’s action as a “one-off” devaluation that will be followed by attempts to make the exchange rate more variable, based on market forces.
“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the PBoC said in a statement.
Both investors and analysts see Beijing’s moves this week as a sign that China’s economy is weakening faster than expected. On Wednesday, the government released figures showing that industrial production in July had only risen 6 percent from the previous year. That rise was less than expected, and lower than a 6.8 percent increase the previous month.