China’s central bank put a brake on the steep decrease in the value of the yuan against the dollar on Friday. The Chinese currency depreciated by 4.5 percent in the previous three days, marking the biggest drop in decades.
The surprise devaluation, which triggered concerns of a currency war, was seen as the latest measure to help boost China’s exports at a time when the world’s second-largest economy is struggling with its worst slowdown in more than two decades. China has set this year’s economic growth rate at 7 percent, marking the slowest expansion in 25 years.
The measure by the People’s Bank of China to allow the renminbi to nosedive has raised speculation that the Chinese economy has more severe problems than thought. It has even brought into question Chinese authorities’ ability to manage the economic slowdown when rapid growth has become a norm.
The PBOC, which raised the daily fix around which the yuan trades against the dollar by 0.05 percent on Friday, has tried to ease worries about a currency war, asserting that there is no basis for the devaluation to persist.
But the prevailing sentiment in markets is that the renminbi will continue to lose value against the dollar into next year.
The current situation recalls Beijing’s relentless devaluation of the yuan in the early 1990s. The foreign exchange crisis that hit Korea and other Asian countries in 1997 was partly attributable to the steep depreciation of the yuan, which weakened the competitiveness of their exporters. Japan went unscathed as it had been in tune with China’s currency policy by devaluing the yen in the preceding years.
This time around, the sharp fall in the renminbi is preceded by Japan’s drive to lower the value of the yen through massive quantitative easing, which started in 2012.
This is not the time for Korean economic policymakers and the central bank to remain at ease. Serious consideration should be given to cutting the key interest rate even further and increasing money supply. These measures should be taken well ahead of a U.S. rate hike expected to come later this year, which would spark fears of capital outflows from the country.
