What China’s Yuan Devaluation Means

This article was originally posted by Business Insider:

BEIJING (AP) — China devalued its tightly controlled currency Tuesday following a slump in trade, allowing the yuan’s biggest one-day decline in a decade.

The central bank said it was trying to make the state-controlled exchange rate more market-oriented.

In recent months, the yuan has strengthened along with the dollar, making Chinese exports more expensive and raising the risk of politically dangerous job losses in industries that employ tens of millions of workers.

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HOW IS CHINA’S CURRENCY SYSTEM DIFFERENT?

Beijing uses what it calls a “managed float.” It allows the yuan’s exchange rate to fluctuate within a band 2 percent above or below a point set by the People’s Bank of China based on the previous day’s trading. That allows the exchange rate to rise or fall in response to supply and demand but prevents wide swings that might hurt traders.

This is different from other major currencies such as the U.S. dollar and the euro, which are freely traded. But most other countries also regulate exchange rates based on an “anchor currency” such as the dollar to prevent abrupt swings that might hurt their economies. In China’s case, the United States and other major trading partners complain Beijing suppresses the yuan’s value, giving its exporters an unfair price advantage and hurting foreign competitors.

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