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China cuts value of its national currency

> China's bold move Tuesday to sharply devalue its currency threatens to squeeze exporters around the world whose goods will likely become comparatively costlier than many Chinese products. The action has also intensified fears about the weakening of the world's second-largest economy, whose growth rate has reached a six-year low as exports have steadily dwindled. A cheaper yuan will benefit China's exports by making them less expensive overseas. Yet those gains would come at the expense of manufacturers in other countries, including the United States and Europe. Associated Press

Here's what you need to know about China's devaluation of its currency:

What does it mean for a country to devalue its currency?

Devaluation is a deliberate decision by a government to adjust the value of a currency downward relative to another currency or standard.

In China's case, the country's central bank has adjusted the daily trading band for the yuan, which is allowed to fluctuate 2 percent above or below a rate set by the People's Bank of China based on the previous day's trading.

What exactly the exchange rate was dependent on is secret, though significant capital outflows in recent months have suggested that the yuan should be losing value and it hasn't.

If the band is moving in line with the market in the next few days, it could be seen as real reform.

Why is the Chinese government doing this?

The central bank said the devaluation is an attempt to let market forces have a greater role in the yuan's exchange rate.

The United States and other trading partners have long called for the government to loosen its tight grip over the country's currency valuation, saying the decision hurt foreign competitors and gave Chinese exporters an unfair price advantage.

There might be an additional incentive. At the end of the year, the International Monetary Fund will decide whether the yuan should be included in something called "special drawing rights," which would basically mean including the yuan alongside the U.S. dollar, the euro, the British pound and the Japanese yen as a formal reserve currency.

The IMF has said China needs to do more to allow foreign access to its stock markets and make other changes before it includes the yuan in the special drawing rights.

Giving the market a bigger role in determining the value of the yuan would be a positive sign to the IMF and help China achieve its stated goal of making the yuan a more international currency.

What's the impact in China?

The devaluation of the yuan could help stimulate China's declining export industry and boost the country's economic growth slump.

But some analysts were skeptical that the move was made with only Chinese exporters in mind. As the export industry declined, China ran the risk of huge job losses in the manufacturing industries, which could be politically dangerous.

There's also some collateral damage alongside the potential benefit to exports. A weaker yuan will raise costs of imports, including oil, which led to the fall of Chinese airline stocks after the announcement. It can also drive up the cost of servicing foreign debt held by Chinese companies.

What is the U.S. impact?

U.S. stocks opened lower and prices for copper and oil dropped after China devalued the yuan. The Dow closed down 212 points Tuesday. A cheaper yuan also hurts U.S. manufacturers that want to sell to China and makes U.S. goods more expensive in relation to Chinese imports.

The devaluation of the yuan could also make the U.S. Federal Reserve reluctant to raise interest rates this year, as planned.

Have other countries devalued their currencies recently?

Both the European Union and Japan have depressed the value of the euro and the yen over the last two years.

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