BEIJING -- China's falling currency is fueling concern about a possible "currency war" if other governments fight back with their own devaluations to compete in export markets.
Shock waves from Tuesday and Wednesday's devaluation against the U.S. dollar spread through financial markets, causing stocks and Asian currencies to tumble.
The People's Bank of China said the yuan's decline was a one-time event and part of changes aimed at making the tightly controlled currency more market-oriented. But analysts said allowing market forces free rein could drive the yuan sharply lower. Those suggestions gained credence when the currency slid another 1.6 percent Wednesday after Tuesday's 1.9 percent drop.
"It is very possible that we could see a 10 to 15 percent drop in the exchange rate against the U.S. dollar in the next week or two," said Duncan Innes-Ker of The Economist Intelligence Unit in a research note.
Stock investors have been punishing the shares of companies that do big business in China. A cheaper yuan, after all, drives up the price of foreign goods in China. It hurts earnings, too: The revenue that foreign companies collect in yuan from China sales are worth less when converted back into their home currencies.
Shares in Yum Brands Inc., for instance, dropped nearly 9 percent Tuesday and Wednesday. The parent company of KFC and Pizza Hut has 6,800 restaurants in China and plans least 700 more this year.
China's actions may be a short-term currency move, but some analysts are worried about something deeper: that the sudden devaluation reveals how frightened Chinese officials are about the health of their economy.
"It's not about a minor devaluation," said Greg McBride, chief financial analyst at Bankrate.com. Instead, "it's all about yet another move of desperation to juice the Chinese economy."
The yuan's decline was small compared with fluctuations of freely traded currencies. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the United States.
While the International Monetary Fund welcomed Beijing's support for market forces, the change sparked complaints in Washington by lawmakers who accuse China's communist leaders of manipulating its currency to gain a trade advantage.
"This move may also trigger a new currency war" if central banks respond by trying to depress their countries' exchange rates, said Nicholas Teo of CMC Markets in a report.
Asian currencies declined as the lower yuan weighed on prices in markets where China is a major trader. Malaysia's ringgit and the Indonesia rupiah plunged to their lowest levels in 17 years. The Singapore dollar, Taiwan dollar and Philippine peso fell to five-year lows.
China is exporting "deflationary pressure," said Morgan Stanley analysts Hans Redeker, Ian Stannard and Sheena Shah in a report.
An extended slide in the value of the yuan risks triggering a series of competitive devaluations and threatens a global deflation shock as prices of exports and commodities fall. Morgan Stanley said Wednesday that China's export of deflationary pressures "is not a marginal event" given its $10 trillion economy and a deepening slump in producer prices.
"Until Tuesday the two biggest economies in the world -- the U.S. and China -- had shared the burden of stronger currencies," said Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP. "But we have likely seen China breaking off, leaving the U.S. as the sole economy bearing the burden."
The currency realignment will lower profit margins and exports in the U.S., said Jen. It should also enable China and Asia to export some deflation to the rest of the world, he said.
On Wednesday, the Chinese central bank indicated it had no immediate plans to stop the yuan's decline. It said the fluctuations would "converge to a reasonably stable zone" after a "short period of adaptation."
Until now, Beijing set the yuan's value each day on the basis of a basket of currencies that is believed to be dominated by the U.S. dollar. That meant the yuan rose with the dollar over the past year, hurting Chinese exporters and raising the threat of politically dangerous job losses. Exports in July fell by an unexpectedly steep 8.3 percent from a year earlier.
The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set by the People's Bank of China on the basis of its currency basket.
The central bank said that starting Tuesday, the daily target would be based on the yuan's closing the previous day and information from traders about currency supply and demand.
Tuesday's change probably was the "start of an engineered depreciation," Mizuho Bank said in a report.
China's economic growth has slowed to an annual rate of 7 percent, which is healthy for most countries but far below the previous decade's double-digit pace.
By the official measures, the economy is growing at 7 percent, right in line with government targets. It is a steady pace that the leadership has indicated can support decent job growth and put more money into consumers' pockets.
But a look below the surface shows a different, more worrisome picture, economists say.
Core parts of the economy, such as construction, are weaker than ever as the real estate industry struggles. Consumer spending, which was supposed to pick up the slack, is not that strong. And financial services, which were a major driver of economic growth when the stock market was booming, are slipping.
The data coming out of China, too, is somewhat suspect. Economists now wonder whether, despite official figures showing growth, some provinces and regions could be dealing with recessions.
"To be honest, no one has a clue where the economy is, and I don't think that it's properly measured," said Viktor Szabo, a senior investment manager at Aberdeen Asset Management. "Definitely there is a slowdown. You can have an argument about what level it is, but it's not 7 percent," he added.
China becomes the third major trader to take actions that lower the value of its currency. Initiatives by Japan and the European Union over the past two years depressed the yen and euro by wider margins than this week's decline in the yuan.
The move could complicate the U.S. Federal Reserve's decision about when to raise interest rates that have been near zero since the 2008 global financial crisis. The Fed was expected to act later this year.
A weaker yuan would reduce the price of Chinese goods, pushing down already-low U.S. inflation of 1.3 percent. The Fed wants to be "reasonably confident" inflation is returning to its 2 percent target before raising rates.
The IMF said the latest change would have no effect on the decision about whether to add the yuan to the dollar, the euro, the yen and the British pound in the basket of currencies used to set the value of the IMF's in-house currency, called Special Drawing Rights.
The IMF staff recommended last week that China wait until at least October 2016 to join. The IMF's board is to consider that recommendation in October.
"The more liberal approach to managing the exchange rate could bolster China's claims that the renminbi is 'freely usable,' strengthening its case for inclusion in the IMF's SDR currency basket," said Innes-Kerr of the Economist Intelligence Unit.
"However, suggestions that China is engaging in a currency war could undermine the political goodwill toward it that will ultimately decide whether or not it is permitted to join."
Information for this article was contributed by Joe McDonald and Paul Wiseman of The Associated Press and by Neil Gough and Xiaoqing Pi of Bloomberg News.
Business on 08/13/2015