Peking Devalues Its Currency to Boost Exports

China devalued its currency by 15.8% against major foreign currencies Saturday in a move to boost exports and better align its exchange rate with domestic price changes.

The People’s Bank of China, China’s central bank, reduced the value of the Chinese yuan to 3.7 to the U.S. dollar from the previous rate of 3.2 to the dollar, and made similar 15.8% devaluations for other foreign currencies.

Bank President Chen Muhua said the devaluation was necessary “to encourage exports and balance foreign income and outlay,” the official New China News Agency reported.

Western bankers and diplomats praised the decision, saying it is sensible in light of falling prices for China’s main commodity exports, especially oil, and would help cut the trade deficit. Oil is China’s biggest foreign exchange earner, accounting for 20% of total export earnings last year.

“The main reason for this dramatic move, a record devaluation in a single day, is the serious position in China’s foreign trade this year, mainly because of the plunge in oil prices,” one Western diplomat said.

The diplomat said China had also been hard hit by falling prices for agricultural goods, which make up a substantial part of its exports.

Analysts say there is no sign of a quick turnaround and the country is heading for a third year of deficit.

Latest customs figures show a trade deficit of $4.4 billion in the first four months of 1986, compared with $3.9 billion in the same period last year.

Last year’s record deficit was put at $7.61 billion by the Foreign Trade Ministry, while customs figures showed it at $14 billion. Both organizations regularly give different figures. The deficit sharply reduced China’s foreign exchange reserves.

“China has done what a Western country would do in the same situation. It is a wise decision which will boost China’s export earnings and as a result its ability to buy goods from abroad,” one European diplomat said.

Foreign Trade Minister Zheng Tuobin said in an interview in May that exports are important in China’s ambitions to become an industrialized nation, and largely determine the pace at which it modernizes.