Why China Devalued Its Currency

The move is another sign that the world’s second-largest economy is slowing down.

Andy Wong / AP

China devalued its currency Monday amid signs that the country’s economy—the world's second-largest—continues to slow down.

The People’s Bank of China, the country’s central bank, set the value of the yuan nearly 2 percent weaker against the dollar. The devaluation was the currency’s biggest depreciation since China’s modern exchange-rate system was set up in 1994.

The Wall Street Journal has more on the reasons for the central bank’s move:

Chinese authorities said the change would help drive the currency toward more market-driven movements. The move also signaled the government’s growing worry about slow growth. A shift toward a weaker currency could help flagging exports at a time when many other efforts to boost the economy haven’t proven very effective.

China’s breakneck pace of economic growth over the past decade has lifted millions of people out of poverty, dramatically raised living standards, and vaulted the country to a global economic powerhouse. But now that growth appears to be sputtering, and could fall short of the projected 7 percent. Last month, the government had to intervene amid a dramatic decline in Chinese stocks, and consumer demand appears to be falling.

The central bank’s move would make the yuan cheaper, and make Chinese exports more attractive. But, as The New York Times reports, the move could anger American critics of China's currency policies.

China’s devaluation represents a difficult dilemma for the Obama administration. The United States Treasury has tried to use quiet diplomacy in recent years to encourage China to free up its currency policies, while blocking efforts in Congress to punish China for major intervention in currency markets over the past decade to slow the rise of the renminbi. Many in Congress have long accused China of unfairly building up its manufacturing sector at the expense of American jobs by undervaluing the renminbi, and the Chinese devaluation could fan those criticisms.