China Devaluates Currency; Multiple Effects On Global Economy

Transcript

STEVE INSKEEP, HOST:

Let's ask now what China's currency devaluation means to Americans. China's central bank surprisingly pushed down the value of Chinese currency last week. That came after China's stock market abruptly collapsed. David Wessel has been tracking all of this. He's director of the Brookings Institution's Hutchins Center and a contributing correspondent to The Wall Street Journal as well as a regular guest on this program. David, good morning.

DAVID WESSEL, BYLINE: Good morning, Steve.

INSKEEP: What makes it such a big deal when China alters its currency exchange rate?

WESSEL: Well, look, China is now a huge economy. By some measure that economists used to compare countries, it's now as big as the U.S. So basically, what happens in China doesn't stay in China. When its economy slows down, as it has, its thirst for commodities is reduced, and that's pulled down the prices of everything from copper to gasoline.

It's good for American consumers, bad for Africans and Latins who export these stuff. And so when the value of any currency decline - and the Chinese currency has lost about 3 percent last week, which is a lot - its exports become cheaper and that gives their exporters an edge over competitors in other country.

INSKEEP: OK, so Chinese-made toys or electronics or anything just got a little bit cheaper in the United States. Is China just trying to boost exports and prop up its economy?

WESSEL: Maybe. I mean, depreciation in the currency certainly has that effect, and it comes at a time when we know Chinese leaders are alarmed that their economy may be slowing faster than they had anticipated. And if the central bank continues this way - and it hasn't today - that will lead people to believe that this is just an export-boosting maneuver.

But there is an alternative explanation. The Chinese are very eager for their currency to be blessed by the International Monetary Fund as an international benchmark currency. And to that end, the IMF has actually been pressing China to loosen the government's control over the exchange rate, let market forces move it around a bit. So some analysts say that actually was the primary motive for last week's move, although it was very clumsy if that was the idea. But the IMF has called it, quote, "a welcome step." And, of course, these two things could both be true. It does make the market a little more of a force in moving the currency, but it has the beneficial effect of boosting exports.

INSKEEP: Well, it's interesting, our colleague Jim Zarroli's been reporting on this as well, this possibility that China is trying to improve the credibility of its currency. China's been accused of being a currency manipulator by any number of American politicians. What does it mean to the United States that they let the currency float a little bit here but what they're actually doing is cheapening their exports to the United States?

WESSEL: Well, I mean, there will be some in Congress who say this is just another example of currency manipulation. But if you look around the world right now - China, the slow-down in other emerging markets, Japan and Europe - the U.S. economy is a standout. We finally have some home-grown momentum here; unemployment is down, hiring is up, consumer spending has picked up a bit. So that's why the Fed has said that the economy no longer needs short-term interest rates at zero - where they've been since 2008. And it plans to raise them before the end of this year, perhaps as soon as mid-September.

But the Fed has also said that the timing of this move depends on what it calls international developments. So if China's currency and stock market moves are sent - and that the global economy is slowing down a lot, or if all this turmoil around the world sharply raises the value of the U.S. dollar against all other currencies, well, that could lead the Fed to hold off on that much-anticipated rate hike.

INSKEEP: Your phrase will stay with me David, what happens in China doesn't stay in China. Thanks very much.

WESSEL: You're welcome.

INSKEEP: That David Wessel of Brookings and the Hutchins Center at Brookings also with Wall Street Journal. Transcript provided by NPR, Copyright NPR.