China’s currency devaluation continued for a third day Thursday, as the country’s central bank set the official exchange rate of the renminbi against the U.S. dollar 1.1 percent lower than the day before. Since Tuesday, when the People’s Bank of China stunned markets by announcing the devaluation, the yuan has fallen 4.4 percent, triggering fluctuations in equity markets around the world.
The Chinese government has attempted to allay fears about the drop, claiming the fluctuation is the result of a policy shift designed to make the currency more market responsive. For the past decade, Beijing has established a “soft peg” of the renminbi against the dollar, allowing the currency to maneuver within 2 percentage points of a government-mandated figure. This shift will make the yuan eligible for consideration as a reserve currency, a status afforded to currencies such as the yen, dollar, and euro.
But other observers paint a less rosy picture. In addition to acceding to International Monetary Fund-mandated targets for currency internationalization, a weaker yuan will make Chinese exports cheaper and more competitive in global markets. The currency drop then, in effect, is a form of monetary stimulus. China’s gross domestic product is humming along at 7 percent, in line with goals set by the Chinese Communist Party. But the underlying data—such as real estate, construction, and logistics markets—suggest this figure may be artificially high.