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A chain reaction of stock market turbulence continues around the world following the devaluation of the Chinese yuan earlier this month. The surprise move by the People’s Bank of China, which appeared to reflect the Chinese leadership’s attempt to help buoy exports through a cheaper currency, resulted in underlining the seriousness of the slowdown of the country’s economy. The Nikkei average on the Tokyo Stock Exchange fell for six straight trading days in a row to Tuesday — the first time since Prime Minister Shinzo Abe returned to office in December 2012, plunging to a six-month low below 18,000.

Various other factors are contributing to the market turbulence, including the speculation over a U.S. interest rate hike that could result in the pullout of funds from currency and stock markets in emerging economies. The turbulence in share prices reportedly led investors to shift their funds to safe havens such as the yen, pushing the currency to a seven-month high against the dollar in Monday’s New York trading and threatening to trim the earnings of globally-operating major Japanese firms.

Still, the biggest concern remains the severer-than-anticipated slowdown in China’s growth and its worldwide impact. While the market turbulence may stabilize at some point, Japan should brace for a “China shock” to the global economy, particularly in view of the growing dependency of its economy on Chinese demand — including the spending spree by the record numbers of Chinese tourists who are visiting the country.

China has so far weathered the potential crises by taking various policy steps, including a massive 4 trillion yuan stimulus in response to the global recession triggered by the 2008 collapse of Lehman Brothers. This time, the warning signs are flashing on many of its key economic indicators, and the currency devaluation appeared to underline the sense of crisis held by the leadership of President Xi Jinping.

The yuan’s devaluation also highlighted the opaqueness of China’s foreign exchange system. Beijing should change its ways and pursue liberalization of the yuan’s exchange rate regime.

The Chinese central bank lowered the center of the yuan’s trading band for three days in a row from Aug. 11, devaluing the currency by a total of 4.5 percent. The devaluation sent shock waves through financial markets worldwide, fueling concerns over the Chinese slowdown dragging down the global economy, and the market turbulence continues two weeks later.

Under its managed floating exchange rate system, China had in fact earlier kept the value of the yuan relatively high. In this sense, the recent rounds of the yuan’s devaluation might be considered to be in line with market principles. In fact, Beijing has explained that the move represents a reform in the direction of leaving the yuan’s exchange rate to market forces. However, few are likely to have taken such an explanation at face value. Beijing will not be able to evade criticism of opaqueness in its currency exchange regime as long as it maintains the current system, which, along with its intervention in the stock market to shore up prices, raises doubts about its commitment to market-oriented reforms.

In light of its growing clout in the world economy, China has been urging the International Monetary Fund to include the yuan — along with other key currencies such as the U.S. dollar and the yen — among a basket of currencies that set the value of its special drawing rights (SDR). The IMF has in turn called on China to move toward an effective floating exchange rate system within two to three years. Change in its exchange regime seems inevitable as China proceeds with economic reforms. Beijing should realize that if the yuan is traded under the floating rate system, its value would go down sharply in step with a slowdown in the country’s growth, thereby shoring up China’s exports and underpinning its economy.

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