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Beijing weakens yuan, and Chinese exporters love it

A woman trades money at a currency exchange at Haneda Airport in Tokyo, Aug. 12, 2015.
Yuriko Nakao | Bloomberg | Getty Images
A woman trades money at a currency exchange at Haneda Airport in Tokyo, Aug. 12, 2015.

Stock markets around the world were shaken Wednesday on news that China had weakened its currency—for the second time in as many days—in a step to boost a slowing economy.

The People's Bank of China set the yuan's official rate at 6.3306 to the U.S. dollar, down 1.6 percent from the previous day and following a 1.9 percent devaluation on Monday. According to Reuters, government officials have been seeking a devaluation of as much as 10 percent to help the country's struggling exporters.

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Now is a convenient time for the government to allow the currency to fall. By linking the yuan to the dollar, the government forced exporters to ride along with the strong dollar, which is up almost 20 percent from a year ago, relative to the basket of world currencies in the U.S Dollar Index.

That means that as the U.S. dollar has risen, China has found itself becoming a less competitive exporter to some of its most important trade partners.

Europe and the five countries above bought a total of $1.1 trillion in exported goods from China in the last 12 months. That's 45 percent of all exports from the country. Most are also buying more than they did the year before.

But those countries have also seen their currencies plummet by an average of 20 percent relative to the yuan, making goods from China that much more expensive. Economists are wondering if China is simply using the pretext of market liberalization as cover for devaluation designed to boost exports.

Gross domestic product growth in the world's second-largest economy has been falling from double digits in 2009 and 2010 to about 7 percent today, and some analysts think that even those reduced numbers may be inflated.

Chinese manufactured goods have also suffered in recent months; data released on Saturday showed exports were down 8.3 percent in July from the year before.

The IMF said that the changes to how the government controls China's currency—which will use the previous day's trading close to set the midpoint for the next day—are a step toward allowing the currency to be moved by market forces. The government reportedly intervened to prevent the yuan from falling too far on Wednesday.

But the devaluation has sparked fears of a "currency war," and could lead the Federal Reserve to postpone an expected rate hike. Economists are wondering if China is simply using market liberalization to justify the currency devaluation they were seeking.