China Moves To Devalue Currency, Investors Cringe

The People's Bank Of China slashed its daily reference rate by 1.9 percent this week, a move which devalued the nation's currency the most in 20 years. The decision sent shockwaves around currency markets and gave investors reason to further question whether or not Chinese policy makers will ever truly liberalize the nation's economy.

Economic Slowdown

The major reason for the devaluation was China's flagging economy. The Asian superpower has seen exports decrease sharply and its central bank has become worried as deflation is becoming a very real possibility. While the PBOC's decision to lower its daily reference rate is likely to help out exporters, the nation could also see massive capital outflows as the yuan's depreciation pushes people to take their cash elsewhere.

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Currency Devaluation

Manufacturers in the United States have long criticized China for artificially lowering its currency in order to support its own industry. The nation's trade partners claim the practice is unfair and stifles competition from other regions whose currencies are determined by market forces. This has been a hot button issue for next year's presidential candidates, especially in regard to President Barack Obama's planned Trans-Pacific Trade Partnership.

Investors Skeptical

China has been working to gain favor in the eyes of international investors by making its markets more accessible and trying to have the yuan added to the currencies tracked by the International Monetary Fund. However, Tuesday's decision could undo some of the nation's progress toward enticing investors as it shows that the government still controls most of China's market forces. The rate decrease is also likely to have a negative impact on the IMF's decision on whether or not to include the yuan.

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