Ending years of non-combatant status, China has succumbed to the global currency wars.
 
The Peoples Bank of China Tuesday announced its sharpest-ever devaluation of the yuan, also known as the renminbi. That followed news the previous day of an utterly stunning 8.3% year-over-year plunge in exports, which are still the main source of growth for the nation’s economy.
 
Expectations of such drastic action had helped send the Shanghai Composite soaring nearly 5% Monday. Various other more apparent measures, such as merging some state-owned enterprises in order to boost their value, got credit for the pop.
 
But easing the vise of tight money -- evidenced by an overvalued yuan -- is the surest tonic for equities, especially when they are faltering. As usual, it was another case of buy ahead of the news; the Shanghai market failed to extend its advance and was basically flat at midday Tuesday.
 
While the PBOC has maintained a steady exchange rate for the yuan of 6.2 to the U.S. dollar, that has meant a steep appreciation versus other currencies. That’s because the redback -- the nickname of the Chinese currency for the color of its notes -- has risen in tandem with the greenback.
 
The result has been a sharp increase in the yuan’s value against major trading currencies such as the euro and the Japanese yen -- in no small part because of their own policies. The European Central Bank and the Bank of Japan are both engaged in quantitative easing to expand domestic liquidity and cheapen their currencies, all designed to spur their respective economies.
 
At the same time, currencies from the Brazilian real to the Australian dollar have suffered as the declines in the prices of their key commodity exports have fallen, especially as demand from the key customer -- China -- has faltered. Other exporters in the region, from South Korea, Indonesia, Malaysia and Taiwan have seen their currencies slump as their competitiveness has suffered.
 
The net effect has been a real 20% appreciation in the yuan in the past year, when inflation differentials and trade flows are taken into consideration, according to Reorient Capital. Since 2009, China’s currency has increased some 60% in real, trade-weighted terms -- a stealth increase while Chinese authorities have maintained stability versus the U.S. dollar, the Hong Kong-based firm writes.
 
Continuing to allow this currency appreciation would have been a case of keeping up appearances while circumstances deteriorated. And for a time, the PBOC has managed to so even as it took steps to ease domestic monetary conditions through a series of interest-rate cuts and reductions in the reserve requirement ratios.
 
But to keep up the appearance of a stable currency amid plunging exports and the exodus of capital, the monetary authorities were selling some $180 billion of U.S. Treasury securities in March to May, according to U.S. data, and using the dollars to buy up yuan to prop up its value.
 
So, why now to stop keeping up appearances? As colleague Wayne Arnold wrote last week on Barrons.com’s Asia Edition, the International Monetary Fund last week suggested pushing back decisions on revising the Special Drawing Right from this January to next September.
 
Having the yuan included in the SDR was a matter of prestige for China’s government and part of its campaign to have its currency take its place alongside the dollar as a main medium of exchange and store of value. But with exports plunging, the economy faltering and the stock market plunging, practicalities apparently took precedence over appearances in the PBOC’s decision to let the yuan fall.
 
A boost for China’s flagging economy, to be sure, which can use it. While official gross domestic product data magically hit Beijing’s 7% target, other data -- most notably the latest export numbers -- fall far short. A cheaper currency is just the prescription for what ails China’s economy.
 
But for the rest of the world, not so much. A cheaper yuan serves to export deflation to China’s competitors and trading partners in the form of lower prices. Which Vietnam, Malaysia, Indonesia, Taiwan, India et al have to match.
 
China’s priority is to keep its factories humming -- both to employ its population to maintain social stability and to service its massive debt. Total household and corporate debt has soared past 200% of GDP, up from 125% in 2008, according to Bloomberg. Debt denominated in foreign currencies just got even more burdensome as a result of the yuan’s devaluation.
 
The bull case on China has been that its deft officials will be able to pull off the feat of bringing its billion-plus population into the modern age from their previous primitive existence in one great leap forward, to use Mao’s term. That there will problems along the way in performing that feat -- mainly on credit -- shouldn’t be surprising.
 
Adjusting China’s currency’s exchange rate should be a small matter. But it is the latest salvo in the war of competitive devaluation, and from the biggest gun.