China took a dramatic step Tuesday to devalue its currency, a move likely to boost its economic growth, harm American companies and inflame a heated debate in the United States about whether China is stealing middle-class jobs.
The announcement about the Chinese currency, known as the yuan or renminbi, represented the largest devaluation in two decades and upended global financial markets, sending the Dow Jones industrial average down 212 points, or 1.21 percent, to 17,403.
The move stirred concern among U.S. politicians who have long complained that China leaves its currency at a lower value to benefit its domestic industries. A weaker currency makes U.S. goods exported to China more expensive and Chinese goods exported abroad relatively cheap. China’s move could weigh on sales of American companies, from well-known brands such as Apple to thousands of smaller companies, threatening to slow the U.S. economic recovery.
Liberals and conservatives, some of whom have held out China as a global boogeyman taking advantage of U.S. workers and companies, lashed out at the decision on Tuesday.
“For years, China has rigged the rules and played games with its currency, leaving American workers out to dry,” said Sen. Charles E. Schumer (D-N.Y.). “Rather than changing their ways, the Chinese government seems to be doubling down.”
“They’re just destroying us,” businessman and Republican presidential front-runner Donald Trump said in a CNN interview. “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.”
Beijing’s move on currency could also have broader political ramifications in Washington, where the Obama administration has been under increasing pressure from members of Congress to get tougher on China ahead of President Xi Jinping’s first state visit to the White House next month.
Lawmakers have expressed alarm at a series of provocations, including the alleged hacking by the Chinese of U.S. government workers’ personnel records and maritime skirmishes between China and its neighbors in the South China Sea.
The criticism has put the White House in a tricky position as President Obama attempts to negotiate and win final approval for a sweeping Asia-Pacific trade deal by year’s end.
The administration has successfully lobbied against stronger currency standards from being added by lawmakers into legislation granting the president new authority to complete the accord. But some lawmakers on Tuesday cited Beijing’s actions as they renewed calls for such provisions — even though China is not involved in that deal.
In a statement, the Treasury Department cited progress from China, which until recently has been allowing its currency to appreciate, and said it would continue to monitor the changes Beijing announced Tuesday. “Any reversal in reforms would be a troubling development,” the department said.
Some analysts view the currency devaluation as an effort by Chinese officials to prop up a slowing economy. The Chinese economy grew 7 percent year-over-year in the first quarter, the slowest pace in six years. Chinese exports plummeted 8.3 percent year-over-year in July, according to data released last weekend.
But the Chinese central bank argued that its goals were more mundane than manipulating exports and growth. It said that the change was a “one-time correction” to allow it to set exchange rates in line with free-market practices.
China still tightly controls the flow of money across its borders, which allows it to control its exchange rate. Allowing a more flexible exchange rate that responded to the open market would correspond with U.S. hopes for a more open Chinese economy.
But another reason U.S. politicians have sought a more market-oriented exchange rate is that they assumed it would increase the value of China’s currency. In April, the Treasury Department praised China’s recent efforts to allowing the renminbi to rise but said the currency remained “significantly undervalued.”
Not all economists agree. The International Monetary Fund said in May that China’s currency was no longer undervalued after rising substantially over the past year. If the currency is allowed to move freely, market forces could pressure the currency to depreciate, making Chinese products cheaper compared with American goods. The currency slid 1.8 percent against the dollar on Tuesday.
Economists differ on how substantial an effect the move will have, with some saying that the fallout could be modest because China’s currency has already appreciated so much.
In the United States, a cheaper yuan could weaken American exports to China, widening an already large trade deficit. It also might add pressure on the Federal Reserve to delay raising interest rates, as a rate increase would put upward pressure on the dollar and make U.S. exports even less competitive. The Fed is expected to raise rates as soon as next month.
Stocks of U.S. companies with heavy exposure to China, such as Apple, Caterpillar, KFC parent Yum! Brands and General Motors, all fell on Tuesday. Oil prices also tumbled, as some investors concluded that China’s growth was slowing more than expected.
That follows other challenges. With weak economies, Japan and Europe have also been trying to make their exports more competitive, and the dollar has soared this year. All together, the value of the U.S. dollar could rise enough to apply brakes on the U.S. recovery, Diana Choyleva, chief economist at Lombard Street Research, said in an e-mail.
“They are engaging in this competitive devaluation to try to outbid each other and us for U.S. consumers,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management. “And that is a slow growth, beggar-thy-neighbor outcome that is very disruptive of global growth.”
Jeremie Waterman, the executive director for Greater China and senior policy adviser for Asia for the U.S. Chamber of Commerce, cautioned that it is still too soon to tell how China will proceed.
“If the renminbi is now on a government-induced path to weaken further, while the Fed is moving to strengthen interest rates, that divergence could be a cause for concern in the global economy as well as the bilateral relationship. But we don’t know that yet,” Waterman said.
Some analysts argued that the move had another goal altogether: making the yuan a global reserve currency. The International Monetary Fund recently proposed delaying a decision until the end of next year on whether the yuan would be included in its special drawing rights — a reserve asset that includes the dollar, euro, yen and pound.
The IMF has urged China to merge its government-controlled onshore market with the freely trading offshore market and make its currency more flexible.
David Nakamura contributed to this report.