"The announcement suggests policy makers are now placing a greater emphasis on efforts to combat the deepest economic slowdown since 1990 and reduce the government's grip on the financial system. Authorities had been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and make a case for official reserve status at the International Monetary Fund."
So in addition to fears that China's move will slow the economies of other countries by cutting their exports further, there are concerns that the move is a desperate act by China, reacting to internal knowledge of problems.
The problem with this move by China is that it risks accelerating another of China's problems -- capital flight.
As China's currency falls it risks increasing "capital outflow" and "flight" from cash flowing out of China to protect its value. As a currency strengthens, "hot money" capital flows in, as it weakens capital flows out. If China's currency is weakening money will flee.
Some warn China's sudden and huge move could bring about a currency war. Here's Bloomberg again:
"China's move has raised the risk of a 'currency war' as export rivals seek a weaker exchange rate to stay competitive, according to Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia.
"'It's hard to believe this will be a one-off adjustment,' Roach said. 'In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.'"
A Boost For China, The Rest Of Us Not So Much
Cutting the value of their currency is not a policy that will boost the world's economy. It will come at the expense of export growth in other countries, mostly but not limited to ours. Further, investment manager Bill McQuaker's statement that "what is good for growth in China is unfortunately bad for everybody else" is not exactly a complete interpretation. The resulting capital outflow is bad for China.
China's growth does not have to be at the expense of others. China could boost its own growth in ways that are not "bad for everyone else" by allowing a currency and trade balancing and the resulting overall increase of world trade over the longer term. But this would not provide an immediate shot in the arm in the way the mercantilist policies of currency and other manipulation have done. China's current policies essentially steal the business from other countries and do not expand overall growth and stability.
Our Trade Polices Cause U.S. Job Loss
Meanwhile the U.S. will not adopt trade policies that benefit the overall U.S. economy. June's U.S. trade deficit with China was an enormous, humongous $29 billion -- in just one month and just with China. This deficit is a metric for measuring the loss of jobs, factories and overall wealth from our economy.
China does what China does, for China. The U.S. should do what the U.S. needs to do, for the U.S. Instead, our "free trade" ideology causes us to let mercantilist countries do what they do. Our government's refusal to confront China's currency manipulation, with factories leaving the country and shipping the same goods back, the resulting loss of jobs and drop in U.S. wages benefits a few people at the top of our system.
An issue brief released Tuesday by the Economic Policy Institute (EPI), "Manufacturing Job Loss: Trade, Not Productivity, Is the Culprit," explains how manufacturing jobs began to drop rapidly in 2000. "Specifically, between 2000 and 2007, growing trade deficits in manufactured goods led to the loss of 3.6 million manufacturing jobs in that period." That was before the recession. And since? "[O]nly about 900,000 of the 2.3 million manufacturing jobs lost during the Great Recession have been recovered."
This job loss was the result of trade policies and not technological advancements. Robert Scott, EPI's Director of Trade and Manufacturing Research said, "Manufacturing job losses are not the inevitable result of technological progress. They were caused by trade policy, and they can be reversed by trade policy. We are not losing manufacturing jobs to robots, we're losing them to China."