Why the Chinese currency matters to the U.S. economy

Aug 12, 2015

There was a time when Chinese currency devaluation was a simple issue of competing with U.S. exporters. That is no longer the primary consequence of the yuan’s movements.

“We compete much more with Europe and Japan than we do directly with China,” says David Dollar, senior fellow at the Brookings Institution.  He says the U.S. dollar has already appreciated significantly against the euro and the yen, “so this little bit of Chinese devaluation is pretty small on top of that.”

If sustained, the devaluation could pose risks to U.S. exports, but it would affect many more countries indirectly.  

“What has markets a little more concerned here is that they feel if China’s doing this, then things must be really bad in China,” says Scott Sumner, director of the program on monetary policy at George Mason University’s Mercatus Center. While growth in China has slowed, it has persisted despite continued indicators of sluggishness in retail sales and factory output — and a marked decrease in exports for July. If the devaluation is a sign that things are worse than expected, that worsening would be transmitted to China’s suppliers. 

“China’s a major commodity importer,” Sumner says, “so it affects countries like Brazil and Australia that sell commodities, it affects countries like Germany that sell things like automobiles to China.”

Those countries in turn purchase goods from the United States, so to the extent there is a global slowdown, it could hurt U.S. exporters and manufacturers who are already struggling under a strong dollar.  

The effects are not uniformly negative. 

“A lot depends on where you sit in your relationship with China,” says Clara Gillispie, director for trade, economic and energy affairs at the National Bureau of Asian Research.  “China is a consumer, a supplier, a competitor, a potential partner for different groups within the United States.”

For U.S. consumers and firms with suppliers in China, the devaluation looks more positive, as it will drive prices down. That has implications for another major lever in the American economy: the interest rates set by the Federal Reserve.

“If there are more pressures coming from China and more deflation coming, that could perhaps postpone this interest rate hike people have been expecting toward the end of this year,” says Stephen Kaplan, assistant professor of political science and international affairs at George Washington University. “Whether or not that’s a good thing depends on who you are in the U.S. economy.”

Kaplan says many of these potential implications will depend on whether China’s devaluation is a sustained shift in policy, or a one-time move.