Chinese Currency Devaluation Could Mean Turmoil In U.S. Markets

Transcript

SCOTT SIMON, HOST:

Chinese currency devaluation, not exactly a phrase to set the heart racing but one that made global headlines this week. The value of China's yuan did drop by 4.4 percent, more than it has in two decades. But why should the rest of us - that is, the U.S. - care? We're joined now by Gillian Tett, U.S. managing editor for the Financial Times. Thanks very much for being with us.

GILLIAN TETT: Well, it's great to be on the show.

SIMON: You know, it's often difficult, even for a sophisticated audience like ours, to understand why what happens in currency markets, how it winds up affecting us, if you please, at the supermarket, how it affects us in our daily lives.

TETT: Just think about what's happening at the gas pump right now because we've seen the oil price fluctuate significantly in recent years. Coupled with a currency swing, that's actually delivered significant changes in the price of gas from reckoned consumers. Now, what's happening with the Chinese currency right now is certainly not going to have anything like that scale of impact. But if we do see a new explosion of financial market volatility, one thing that's almost certainly going to happen is that the dollar will strengthen significantly. And that will make it cheaper to import goods from elsewhere. So potentially, that's good for consumers. But it will also make it harder for Americans to actually export from America. And either way, when you get that kind of economic uncertainty and currency market volatility, you tend to dampen down business confidence. And less business confidence tends to mean a soggier economy all around.

SIMON: Which raises the question, to what degree is China's government in control of the currency evaluation? There's - is there a plan or...

TETT: Well, if you want to be optimistic, you could argue that this is really a case of China testing the waters about trying to move from a world where it fixed the value of the currency to one where it's set by the markets. It's trying to move from a world where, essentially, it's been like old-style socialism in finance to one's which is a bit more like something that Americans are familiar with. And by moving to a more floating exchange rate, which has been devalued, it's also trying to win approval from the International Monetary Fund and make its currency more widely recognized as a potential benchmark for the global economy. The pessimistic interpretation is that, actually, this is China panicking about the fact that its economy is slowing down and trying to provide a quick fix boost to its economy and doing so in rather a clumsy way that could actually end up backfiring.

SIMON: Investors don't like to hear words like turmoil and volatility, do they?

TETT: Well, traders often make money off the back of turmoil and volatility. But no, I mean, there was a very nasty pattern that we've seen over the last decade or two, which is that you come to August, a lot of people go off on vacation. A lot of people think that the world should be slowing down, and yet that is when the nastiest financial market crises tend to hit. Think back to 1997, when you had the Asian financial crisis. Then, in 1998, you had Russia. And then you had Long-Term Capital Management, the hedge fund blowing up. And then, of course, in 2008, you had the precursor to the Lehman Brothers crisis as well. So unfortunately, summer months are often anything but a vacation for the markets. I suspect that's part of what's going on right now.

SIMON: Gillian Tett is U.S. managing editor for the Financial Times. Thanks very much for being with us.

TETT: Thank you. Transcript provided by NPR, Copyright NPR.