China's yuan devaluation on Tuesday angers US lawmakers but IMF welcomes move

US lawmakers have condemned China's surprise currency devaluation as a grab for an unfair export advantage.
US lawmakers have condemned China's surprise currency devaluation as a grab for an unfair export advantage.PHOTO: AFP

WASHINGTON (REUTERS) - Senior US lawmakers from both political parties have condemned China's surprise currency devaluation as a grab for an unfair export advantage and urged inclusion of currency manipulation curbs in a new Pacific Rim trade deal.

Several members of Congress said the devaluation of the yuan by China's central bank on Tuesday raised serious concerns. Some suggested it was further proof China cannot be trusted on currency policy.

Their comments on Tuesday (Aug 11) came before China weakened the yuan again on Wednesday. Spot yuan fell to 6.43 per US dollar, its weakest point since August 2011, after the central bank lowered its daily midpoint reference by 1.62 per cent from Tuesday's devaluation. The currency fared worse in offshore trade, touching 6.57.

China's yuan devaluation comes weeks ahead of the first state visit to the United States by Chinese President Xi Jinping amid other tensions over trade, cybersecurity and international development.

Its central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation. "Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the People's Bank of China said in a statement on Wednesday.

Tuesday's devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.

A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3 per cent drop in exports in July and that producer prices were well into their fourth year of deflation.

"It's time for the administration to focus more intensively on China's cheating and label the country a currency manipulator," Democratic Senator Bob Casey, a member of the Senate Finance Committee, said in a statement on Tuesday.

But the International Monetary Fund said on Tuesday that China's move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said in an emailed statement.

But Chuck Schumer of New York, the No. 3 Senate Democrat, said the Chinese currency should be barred from consideration as a global reserve currency until China stops devaluing it.

Representative Sander Levin, the top Democrat on the House of Representatives tax committee, said there was "reason to be skeptical" that the Chinese action was designed merely to move to a market-based exchange rate and said it raised "serious concerns."

He also suggested tough anti-manipulation measures should be part of the Trans-Pacific Partnership trade deal under negotiation.

At least two of the Republican contenders in the 2016 presidential race also weighed in.

"Today's provocative act by the Chinese government to lower the value of the yuan is just the latest in a long history of cheating," said Senator Lindsey Graham of South Carolina.

Real estate mogul Donald Trump, who has frequently promised to be tough with Beijing, told CNN: "They keep devaluing their currency until they get it right. They're doing a big cut in the yuan, and that's going to be devastating for us."

However, many economists noted - before Wedesday's second yuan devaluation - that the Chinese currency has been linked to the US dollar for several years, and so has risen against other major currencies as the US dollar has risen 20 per cent in the past year, making Chinese exports less competitively priced than they were, contributing in turn to the recent slowdown in Chinese economic growth.

"I don't see this affecting the Fed decision (to raise interest rates) unless it develops into something that roils markets substantially," said Peter Hooper, chief economist at Deutsche Bank Securities and a former Fed economist. "It adds a little more drag to the economy via net exports and puts a slight damper on consumer prices, but not enough to alter the course of the US economy or labor market significantly," he said.