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China's falling currency could spark global tensions: Marc Chandler

Daily Ticker

China's falling currency could spark global tensions: Marc Chandler

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China's falling currency could spark global tensions: Marc Chandler

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Whenever a major global economy reverses policy, global markets pay attention. That's exactly what's happening in response to the sharp, quick decline in China's currency.

The Chinese yuan has fallen more than 1% against the U.S. dollar in the past week, after appreciating almost 40% in the past few years. Citing "people familiar with the central bank's thinking," The Wall Street Journal reports "China's central bank engineered" the drop in order to reduce speculation in the currency.

Related: Why you should care that China's economy is slowing

The recent dip in the yuan is "not much" relative to other currencies, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "But in terms of the magnitude for the Chinese it's a big move....They usually let the currency move very slightly...[and] a small move can turn into a lot for some investors," namely those who borrowed funds to  bet big on a continued rising yuan.

Related: Why the U.S. needs to "break up" with China

The decline in the yuan also affects those countries who compete against China in the export market, says Chandler. They had the recent advantage of selling lower cost goods compared to China's when the yuan was stronger, but now that advantage is declining or disappearing. The currency move could "squeeze other countries' profit margins," Chandler says in the accompanying video.

Related: Could China pose a risk to the 2014 global economy?

But should U.S. investors care about China's move?

"Most U.S. investors don't need to pay much attention," says Chandler, "but if China continues to devalue its currency it would probably excite more protectionist sentiment" in the U.S. and other countries.

"It's really about global tensions as the world's second largest economy is slowing down," he adds.

China's economy is expected to grow between 7% and 7.5% this year, well below the 10% annual growth rates  that prevailed before 2009.

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