China’s move to devalue currency could echo globally

Staff and wire reports

China’s surprise move Tuesday to devalue its currency has intensified concerns about a slowdown in the world’s second-largest economy, whose growth rate has reached a six-year low. It is also fanning tensions with the United States and Europe, whose exports could become comparatively costlier.

China’s central bank said the yuan’s devaluation was a result of reforms intended to make its exchange rate more market-based. The yuan is linked to the dollar, which has jumped in the past year. Tuesday’s move will mean the yuan will more fully reflect market fluctuations, Chinese officials say.

U.S. stocks slid, following equities’ biggest gain since May, as China’s currency devaluation sparked concern across global markets that the world’s second-largest economy is headed for a deeper slowdown.

Companies that rely heavily on exports to China, including auto and luxury goods makers, retreated. General Motors Co. lost more than 2.1 percent. Ford Motor Co., which depends less on exports to China, dropped 1.9 percent. Auto-parts makers Delphi Automotive Plc and BorgWarner Inc. declined more than 3.7 percent, tracking GM’s biggest slide in a month as China auto sales slumped to a 17-month low. The Dow Jones Industrial Average dropped 1.21 percent.

GM said in a statement it doesn’t expect the devaluation to materially impact the company’s financial performance in the country, its largest sales market.

“General Motors’ primary approach to managing foreign exchange risk has been to employ a natural hedge by building vehicles for sale in each of our major markets,” it said. “In China, we believe that this approach, along with a well-established local supply chain, mitigates a majority of the risk associated with the devaluation of the yuan. We believe that our exposure is limited and manageable.”

GM said it expects “strong results” in China will be “sustained through the remainder of the year.”

In a note to investors Tuesday, Buckingham Research Group analyst Joseph C. Amaturo said China’s devaluation of its currency “will make it more challenging for U.S. automakers, particularly GM, to generate profits in the region.”

He said a 2 percent decline in the yuan could mean a $50 million hit to GM’s profits based on the $2.1 billion it earned in China last year.

Chery Automobile Co., China’s biggest vehicle exporter, said the move will help its sales overseas, predicting shipments will rise by 20 percent this year. “The weakening yuan is good for us,” said Yin Tongyue, chairman of Chery Auto. “We support it.”

A close peg between the dollar and the yuan has hurt Chinese exporters by keeping their goods expensive overseas, thereby threatening jobs in key manufacturing industries. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier. A cheaper yuan will lower the prices of China’s exports.

“The move signals that (China) is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy,” said Eswar Prasad, an international economist at Cornell University.

Yet many economists cautioned against seeing Beijing’s move mainly as an effort to benefit its exporters at the expense of overseas competitors. They note that China’s currency, left to market forces alone, would have declined in value in recent months.

“It is a small step forward to accommodating market forces,” said Sung Won Sohn, an economics professor at California State University.

The yuan is allowed to fluctuate in a band 2 percent above or below a rate set by the People’s Bank of China based on the previous day’s trading.

The bank said that starting Tuesday, the daily target will be based on where the yuan closed the previous day, a change that gives market forces a bigger role in determining the currency’s level. The center of Tuesday’s trading band was set 1.9 percent below Monday’s level. The yuan quickly fell 1.3 percent against the dollar and was down 1.9 percent by afternoon.

China’s economic growth has slowed to an annual rate of just 7 percent — healthy for most countries but far below the double-digit pace it has enjoyed for decades. The country’s leaders fear that growth below that pace will raise the unemployment rate and possibly lead to social unrest.

Still, China’s action Tuesday sparked complaints in Washington.

“For years, China has rigged the rules and played games with its currency,” said Sen. Chuck Schumer, a New York Democrat. “Rather than changing their ways, the Chinese government seems to be doubling down.”

The Treasury Department’s response was more measured. “While it is too early to judge the full implications of the change… China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,” a statement said.

China becomes the third major economy to act to lower its currency value. Initiatives by Japan and the European Union over the past two years depressed the yen and euro.

Those moves contrast with action foreseen from the Federal Reserve, which is expected to boost the short-term interest rate it controls later this year. A Fed rate hike would likely raise the value of the dollar, which has already jumped about 14 percent in value in the past 12 months against foreign currencies.