U.S. Reacts Warily To Devaluation Of Chinese Currency

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MELISSA BLOCK, HOST:

China is facing a sluggish economy with declining exports. Today, the Chinese central bank moved to weaken the country's currency - the yuan - by nearly 2 percent. Investors around the world took that as a signal China's economy is more troubled than they thought. U.S. officials reacted warily. In the past, the U.S. has accused China of deliberately keeping the yuan weak as a way to boost Chinese exports. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: In recent years, partly in response to U.S. pressure, China has tied the value of its currency to the U.S. dollar. That's meant that as the dollar has moved up dramatically in the past year, the yuan - also called the renminbi - has strengthened nearly 20 percent. Cornell University professor Eswar Prasad says that's put China in a difficult position.

ESWAR PRASAD: Virtually, every major currency in the world over the last year has fallen significantly in value relative to the dollar except for the Chinese renminbi.

YDSTIE: And that's made Chinese goods more expensive and hurt the country's exports. So much of the world viewed China's move today as simply an effort to boost its economy. But Chinese officials counter that the devaluation came because they're moving to a more market-based valuation for their currency - one that trades freely without government intervention. That's another thing the U.S. has been pushing China to do, says Eswar Prasad.

PRASAD: This move really ties the U.S. administration up in knots because China's giving the U.S. exactly what the U.S. has been calling for for a long time, which is a more market-determined exchange rate. But this reform comes at a time that is convenient to China rather than to the U.S. and the rest of the world.

YDSTIE: U.S. exports are already suffering from the strong dollar, and Prasad says this move could hurt trade-related businesses and cause a political backlash. But China expert Nicholas Lardy says U.S. officials should react positively.

NICHOLAS LARDY: The Treasury Secretary Mr. Lew has called for a more market-determined rate for quite some time. This is a move in that direction, so he should applaud it.

YDSTIE: There was no applause from the treasury today. A spokesperson said it's too early to judge the implications of the Chinese move and that the U.S. will continue to push for a market-oriented exchange rate. Lardy believes today's action was largely motivated by the Chinese government's desire to make the renminbi one of the world's reserved currencies. Just last week, an IMF report said China needed a more market-based exchange rate if it wanted the IMF seal of approval for the renminbi.

LARDY: And this is part of a general campaign that China has had for a number of years to increase the international use of the RMB.

YDSTIE: Achieving the elite status of reserve currency is a slow process, says Lardy. It's likely to take a decade or so for the renminbi just to get a toehold. And Lardy says many decades before it might challenge the dollar for the top spot. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.