ROBERT SIEGEL, HOST:
To make sense of the international reaction and China's motives for what it's doing with the yuan, we turn to NPR's Frank Langfitt in Shanghai. And first, Frank, why are markets around the world reacting so negatively to this?
FRANK LANGFITT, BYLINE: Well, first, Robert, it's worth putting this in perspective. You know, we're talking about China. It's a very big country, the world's second-largest economy. And it did something big that it hasn't really done before. It let the currency drop a lot. Usually, the currency here moves very slowly. It's been inching up since, I think, 2005. And I watch it pretty closely 'cause I'm changing money all of the time, and I think in the four years I've been here, maybe it's moved within a percentage point.
SIEGEL: And why does the devaluation seem to have so many people so worried?
LANGFITT: Well, it's kind of about what it could lead to. One fear is possibly a currency war. The question is, will other countries devalue to compete with China in order to keep their exports cheap on the global market? That, of course, could hurt global growth.
The other question is what it might say about the Chinese economy. Is it worse than it looks? If there's less Chinese demand for things like oil and minerals, that's also going to hurt global growth, and it's also going to hurt certain countries that really benefit a great deal from selling those things to China.
SIEGEL: Well, why is the Chinese government doing this? What's in it for them to have a currency that's a lower value against the dollar?
LANGFITT: Well, at least a couple of reasons. And a lot of people look at this and might say it's a sensible move for China. It's worth remembering, China's economy is no longer white hot the way it was. It's not double digit GDP growth. It's been kind of, by Chinese standards, muddling along at about 7 percent. And if you look at just this year, we've had a real estate slump earlier. You remember those drop in the stock market in the last several months. And just last months, we saw that exports were down eight percent.
Now, if you devalue the currency, that lowers the cost of your exports out on the open market. It makes them cheaper and more attractive, and that's a way to kind of bolster the economy here. Analysts, though, think there's a bigger reason, frankly to curry favor with the International Monetary Fund which actually praised the devaluation earlier this week.
SIEGEL: Let the record show, to muddle along at 7 percent annual growth is something that many countries in the world would envy. Why did the International Monetary Fund praise the devaluation, Frank?
LANGFITT: The reason is, China wants its currency to be more broadly accepted globally. They'd like more financial influence. And the government said that it allowed the devaluation to let market forces determine the price. This is what the IMF had said it wants to see before it's willing to actually accept, at some point down the line, using the yuan as a reserved currency like the Japanese yen or the U.S. dollar. The yuan still has a long way to go, but people see this as a gesture to the IMF and in - as a way to help China improve its - the status of the yuan.
SIEGEL: But which is it, here, Frank? Is it that the Chinese are embracing the market, or when, in one instance, the market seems to work their way, they embrace it, and in other instances when it doesn't, they ignore it?
LANGFITT: Well, Robert, analysts would probably say you're on to something here. This is a case where people look at this and say, yes, they are embracing the market. They're allowing the currency to respond to market forces. On the other hand, let's take a look at the stock market over the last few months. That's a totally different case. The government actually encouraged people to buy lots of stocks, pumped up the market, and then when it began to fall, they intervened. They also used the state media to try to stabilize the market. And that's a case where, in fact, they did not want the market to actually work because they were concerned about what was happening to the stocks and also concerned about what was happening to the economy.
SIEGEL: So they're conflicted on that score.
LANGFITT: I think that that is a big dilemma that the Chinese government faces.
SIEGEL: That's NPR's Frank Langfitt in Shanghai. Frank, thanks.
LANGFITT: Happy to do it, Robert. Transcript provided by NPR, Copyright NPR.
