Yuan's Devaluation Could Help China Become A World Financial Player

Transcript

DAVID GREENE, HOST:

Next to China and that country's latest attempt to elevate its status on the world's stage. China's decision to devalue its currency this week is part of a long effort to be seen as a major player in financial markets. But the move carries some risk for the world's economy. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: China is already an economic force, the second-biggest in the world. It's a powerhouse in trade and manufacturing. But it yearns to be more.

VICTOR SHIH: For the top leadership especially, a main motivation is prestige.

ZARROLI: Victor Shih is an associate professor of political science at the University of California at San Diego. Shih says China wants to be respected in the global financial markets like the United States, Japan and England are. That was behind its efforts earlier this year to set up the so-called Asian Development Bank, which lends money for infrastructure projects. And Shih says China's decision to let its currency fluctuate a bit more freely this week is another part of its effort to become a financial player.

SHIH: President Xi Jinping has said repeatedly that China is now a major country, on equal footing with the United States. Part of that is to have China's currency to be a globally accepted reserve currency.

ZARROLI: Specifically, China hopes that the yuan will become one of the small, elite group of currencies used by the International Monetary Fund to determine exchange rates. The others are the dollar, the euro, the yen and the British pound. That would eventually clear the way for the yuan to be used as a reserve currency like the dollar. And it carries with it lots of status. The IMF won't do that as long as the yuan's value is tightly controlled by the government. So China's central bank has been pushing the government to let the yuan fluctuate a bit. But Eswar Prasad, professor of trade policy at Cornell, says this isn't just about status.

ESWAR PRASAD: This notion that a great country should have a currency that matches its stature in international finance provides a very good organizing framework for all of the domestic reforms that they need.

ZARROLI: Prasad says there is a large faction within China that thinks allowing interest rates and currency values to move more freely will help iron out some of the structural problems that now threaten the economy, such as high levels of debt. That's politically difficult because a lot of Chinese banks and companies now benefit from the system. By couching the devaluation in patriotic terms, Chinese officials may be hoping to neutralize the opposition. But Prasad says it's a risky strategy.

PRASAD: China has done this at a time when such a move is going to lead to a deep recession of the currency, which is very good for the Chinese economy but not so good for the U.S. or the rest of the world economy.

ZARROLI: When the yuan loses value, Chinese goods become less expensive, which makes it harder for companies in other countries to compete. And a lot of China's trading partners could be tempted to devalue their own currencies. Countries could end up competing with each other to see who could drive their exchange rates down the most. That could end up bringing a dangerous new note of instability to the world's economy at a time when it's still struggling to recover. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.