Devaluation Of Chinese Currency Fuels Fears About Global Economy's Strength

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Stock markets tumbled around the world today after China decided to devalue its currency for the second day in a row. In the U.S., the major stock indexes fell sharply early on but recovered later in the day. As NPR's Jim Zarroli reports, China's moves are fueling fears that the global economy is more fragile than it appears.

JIM ZARROLI, BYLINE: For a long time, U.S. and European companies have looked at China as a vast opportunity waiting to be tapped. Auto companies, drug makers and purveyors of luxury goods have all made big strides in the Chinese market, and they have hoped to do even better as time goes on. Sara Johnson, senior research director for global economics at IHS, says now a lot of investors are wondering whether China still enjoys such high-growth, and they're beginning to reassess their hopes for the market.

SARA JOHNSON: They're afraid that they underlying situation in China is worse than reported, and that certainly is a legitimate concern.

ZARROLI: The yuan has fallen about 3-and-a-half percent over the last two days. China's devaluation means Chinese goods will be cheaper, which means more competition for U.S. manufacturers. It also suggests the Chinese market may not be as lucrative as they believed - again, Sara Johnson.

JOHNSON: To the extent that China's demand is weaker than reported, it affects commodity markets. It affects trade or export growth for other key economies.

ZARROLI: Companies that do a lot of business in China like Apple and Yum! Brands have been among the hardest hit in the markets. Dave Rousse heads INDA, a trade group representing the nonwoven fibers industry. He says the companies he represents are having to compete with Chinese producers for some low-cost items.

DAVE ROUSSE: There's some international trade. We've had an increase in imports from China on some very low-costing commodity-type fabrics, but we export to China as well.

ZARROLI: Rousse says his members export some high-value specialty fibers that China doesn't make. As the yuan drops in value, those products will bring in less revenue.

ROUSSE: If there's no change in trade flows and in volumes, it will be an impact on financial statements when you translate the currency from China into U.S. dollars.

ZARROLI: But the devaluation poses an even bigger risk to many Asian economies, such as South Korea, Indonesia and Thailand. When the yuan was strong, they were able to sell a lot of their products there. But just like U.S. companies, they now face much tougher competition. The difference is that China is a much bigger market for them than it is for U.S. companies. Forty percent of South Korea's exports go to China. Economist Sung Won Sohn teaches at California State University Channel Islands.

SUNG WON SOHN: Asians are very, very worried because China, from economic point of view, is far more important to them than it is to the United States.

ZARROLI: The question now is how far China will go. Devaluation means that China's goods are less costly around the world, and that will keep more of its factories running. But it could also accelerate the flight of money out of the country, something China is anxious to avoid. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.