The People’s Bank of China allowed the yuan to depreciate by nearly 2% against the U.S. dollar on Tuesday, the result of a surprise policy change that roiled international currency markets.
The sudden devaluation is the largest in two decades, and comes amid slower economic growth and increased stock market volatility in China.
The dramatic devaluation — even if it is a one-time event — is likely to draw intense criticism from some quarters. The U.S. has long accused China of keeping its currency artificially low, instead of allowing it to move freely in foreign exchange markets. A weak currency cheapens the price of a country’s exports, making them more attractive to international buyers by undercutting competitors.
If other nations in the region also decide to devalue their currency in response, it could leading to so-called competitive devaluation, also known as a currency war.
China says the move actually is a response to the market.