China  unexpectedly reduced the outside value of its currency

Beijing is hoping that a more flexible currency will help stabilize China’s sputtering economy. But this monetary high-wire act carries enormous risk.

In a shock move, China on August 11, 2015 set the yuan’s central parity, the rate around which it is permitted to trade against the U.S. dollar, 2% lower. The People’s Bank of China also said it will base the daily rate more on market conditions, a heavy hint that the currency will be allowed to fall further.

This will take some pressure off Chinese exporters. The yuan has been basically fixed against the U.S. dollar since March, but it has appreciated against other global currencies, eroding competitiveness.

Chinese imports have been even weaker than exports, though, largely due to falling commodity prices. As a result, China’s trade surplus in the first seven months of the year actually doubled, to USD 306 billion. This suggests the trade balance wasn’t the primary motive for the currency move.

China’sdevaluation of its currency jolted global markets Tuesday, hitting stocks and commodities and boosting government bonds.

The S&P 500 fell 0.7% in early trade. The pan-European Stoxx Europe 600 index was down 1.5% early afternoon. Oil prices also fell sharply, while demand for haven assets pushed down bond yields in the U.S. and Europe, as investors worried that Beijing’s move signaled growth concerns over the world’s second-largest economy.

A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive, while companies that generate sales in China could find revenue and profit generated in yuan are worth less in their home currency.

Shares of companies that export to China, including luxury-goods firms, car makers and mining companies, came under the most intense pressure.

In Europe, shares in LVMH Moët Hennessy Louis Vuitton and Gucci-owner Kering SA fell more than 3%. Premium auto makers BMW AG and Daimler AG both lost more than 4%, dragging Germany’s export-heavy DAX index to a 2.0% decline. Shares in BHP Billiton  PLC were down 3.9% andRio Tinto PLC lost 2.1%.

Commodity prices, which are sensitive to Chinese demand, fell. Brent crude oil was down 2.4% at $46.16 a barrel.

Yields on 10-year U.S. Treasury bonds fell 0.07 percentage point to 2.15%. The equivalent German yield fell a similar amount to 0.60%. Yields fall as prices rise.