China’s recent devaluation of its currency, the yuan, highlights Beijing’s attempt to reverse the country’s domestic economic slowdown.

Until now, the country’s stimulus efforts focused solely on its domestic market: Beijing encouraged its banks to lend more money and even pumped funds into its stock market in order to boost domestic demand.

But last week’s surprise devaluation has global ramifications. It has caused declines in the worldwide stock markets and in the currencies of other Asian countries, such as Japan, South Korea and Malaysia, that trade heavily with China. It provoked criticism that China has unfairly promoted its exports and it raised questions about whether China can stick with its year-end timetable to open up the country’s markets.

Beijing has answered critics of the devaluation by saying that it was a step toward more market-driven movement of the currency’s value.

In fact, the Chinese move won plaudits from the International Monetary Fund, which called it “a welcome step toward making the yuan more sensitive to market forces.” In May the IMF declared the yuan no longer undervalued because the currency had appreciated by some 30 percent against a basket of currencies.

Effects within China

As it works to establish an appropriate value for its currency, China has conflicting goals. Its leaders want freer capital markets, but they also want to manage their economy to meet their economic goals and keep their people satisfied.

China’s main problem caused by a strong yuan was capital outflows — some $162 billion in the first half of the year. People don’t want their money in yuan if its value is dropping. To entice money back into China, its currency needs to be low enough that investors feel protected against further currency declines.

A weaker yuan also will help Chinese exports by making them less expensive. From a trade perspective, however, the yuan is not over valued. Beijing’s trade surplus in the first seven months of this year doubled, to $306 billion.

Bringing down the value of the yuan creates a problem for Chinese companies, some of which have significant debt denominated in U.S. dollars. A weaker yuan exacerbates their debt burden.

Effects on the US

The Obama administration will use Beijing’s devaluation to promote its trade agreement with the Pacific nations, the Trans-Pacific Partnership, which excludes Beijing. The administration hopes this pact will facilitate trade with other countries in the region as a counterweight to China, the world’s largest trading nation.

China’s devaluation comes one month ahead of a U.S. visit by its president Xi Jinping, to the United States. Relations between the two countries have worsened for the following reasons:

• The U.S. opposes much of China’s territorial claims in the South China Sea.

• Bilateral trade talks have stalled.

• The Obama administration has accused Chinese agencies of cyber espionage.

The American political backlash in response to China’s devaluation to date has primarily been concentrated in states reliant on manufacturing of such things as automobiles and steel.

U.S. companies that have significant sales in China, such as Apple and fast-food retailer Yum, could be hurt by China’s devaluation. For them, a weaker yuan means less revenue when the currency is converted back into U.S. dollars.

On the consumption side, the side of the U.S. consumer, the devaluation makes Chinese goods cheaper. But if these lower prices ripple throughout the U.S. economy, they would impede the Federal Reserve’s efforts to push inflation up to 2 percent, a level it has targeted as healthy.

Some Fed officials have signaled that they are prepared to raise rates for the first time since 2006 at their policy meeting set for Sept. 16-17. On a stand-alone basis, the yuan devaluation should not affect the Fed’s timing.

The bottom line

The desire of China’s leaders for freer capital markets but at the same time to maintain the power to control their economy is like wanting to eat their cake and have it, too. Their actions to intervene in the markets have inspired distrust in investors within their country and outside it. China also suffers from a creaky financial system.

For the yuan to attain the same standing in the world as the American dollar, the Japanese yen, and the euro, the country’s leaders need to:

• Let the market set the yuan’s exchange rate.

• Establish adequate financial supervision to instill global confidence.

Originally published in the Sarasota Herald-Tribune