The People’s Bank of China appears to have caught itself in a conundrum of its own making: yesterday it announced a 1.9 percent devaluation of the yuan, and pledged to allow market forces to have more influence on the currency’s value going forward (a move warmlywelcomed by the IMF). At the same time, Beijing pledged to keep the yuan stable, and at a “reasonable” level. Today, hewing to its new market-based policy, the PBOC set the midpoint for the currency near yesterday’s low market close. During the day, renewed speculation had the yuan trading another 2 percent down, despite PBOC claims to investors that there was “no economic basis” for further depreciation. Finally, in the last 15 minutes of trading, the central bank instructed state-owned banks to sell dollars in order to prop up the yuan, which ended up down less than one percent on the day—a total of 2.8 percent down since the close of trading on Monday.

But just because China wants to modulate the yuan’s descent does not mean it is unhappy with it overall. As we explained yesterday, China is using a moment when market forces are pushing the currency down to do something it wanted to do anyway in order to stimulate exports. And with that we are looking at a major shift in world markets—one with both economic and geopolitical implications.The fact that leaders in Beijing determined that devaluation is necessary is more evidence that the economic troubles we’ve been seeing in China are more than a blip on the screen. Something serious is happening. Depreciating the currency is a way to re-energize an export-oriented economy that has been running low on growth. China wouldn’t do this if it could avoid it; in the past it took great pride in holding its currency steady as other Asian currencies melted down around it. Avoiding the competitive currency devaluation wars was one of the pillars of China’s claim to being more than just another emerging economy. Yet here China is, diving into the Asian currency wars it has so assiduously avoided.

Read the article “ANALYSIS: China’s Devaluation: Much More Trouble to Come?” on the-american-interest.com.