OPINION: When the People’s Bank of China allowed the yuan to drop by 4.4% this week, it sparked fears of a so-called “currency war” with other economies retaliating. Don’t worry, that’s not going to happen. But something much worse might.

The decline in the yuan is not really very large, and the way in which it happened is not all that nefarious. The Chinese central bank normally intervenes heavily in the currency market and they have historically kept it fairly closely linked to the US dollar while smoothing out day-to-day fluctuations.

That stopped, abruptly, on Tuesday. Yet, as Chinese authorities pointed out, absence of intervention is really just allowing a more market-determined price – hardly a cause for alarm. Of course, that market-determined price is, conveniently, lower, hence making China’s goods cheaper for foreign purchasers and hence boosting exports.

However, this has all occurred against the backdrop of a rising US dollar, fuelled by a recovering US economy and the prospect of the US Federal Reserve raising interest rates from historic lows, perhaps as soon as next month.

Put simply, the absence of a Chinese intervention to effectively appreciate the yuan is quite different from an intervention to devalue it. It has been the latter mis-characterisation that dominated most reporting of last weeks events.

China’s actions are less dramatic, and hence less provocative than has been reported. And even though there are many members of the US Congress who have long decried China - with some justification - as a currency manipulator for not letting the yuan appreciate more, they won’t be able to trigger a retributive devaluation of the US Dollar. Even the “audit the Fed” nonsense proposed by Kentucky Senator Rand Paul is on slow burn while Paul concentrates on his presidential hopes.

What is genuinely concerning is what this reveals about the state of the Chinese economy. The fact that Chinese authorities are willing to do something unusual and generate so much bad publicity is the surest sign to date that the Chinese economy is slowing, or has slowed, more than markets previously thought.

While official figures say that the Chinese economy is growing at an annual rate of 7% there have long been concerns about the voracity of those figures, and the recent devaluation only heightens those concerns. Moreover, that growth is not uniformly spread across China. There have been anecdotal accounts that some regions of China have close to zero growth. The devaluation suggests that there may be something to those accounts.

If Chinese growth slows significantly then commodity prices will likely fall further, and the US and European economies will take a serious hit because of their exposure to China. Worse still, there is already a firehose of Chinese capital looking for investment opportunities. Fewer opportunities domestically will only exacerbate this imbalance and it is this imbalance that many see as a driver of “secular stagnation” – a permanent lowering of economic growth in the US and other advanced economies.

Should this scenario eventuate, Australia certainly won’t be spared. China is our largest export market, accounting for around one quarter of our exports. The recent fall in the iron ore price has had a significantly negative effect on the federal budget because of declining tax receipts, and if Chinese growth slows further we can expect more bad news in this regard.

The Australian dollar initially appreciated against the yuan last week, which would not have pleased Reserve Bank Governor Glenn Stevens. Yet the rise against the yuan was relatively modest and the Aussie dollar fell against the US Dollar. In any case, our currency has fallen by so much – more than 25% against the US dollar – in the last 12-18 months that the recent changes are basically rounding error.

The big issue for Australia is not a slight increase in the cost of our goods for Chinese buyers, it’s the fact that there may be much lower Chinese demand period. Significantly lower growth means less construction and weaker consumer demand - and that means lower iron ore and primary produce exports.

That makes the successful passage of the Chinese Australia Free Trade Agreement all the more pressing. With our largest market spluttering we desperately need to lower trade barriers, not be consumed by ideological misinformation campaigns about labour market testing and 457 visa rules.

It would be surprising if the recent moves by China’s central bank ended up triggering a currency war. But those actions may signal a material slowdown in the growth of the Chinese economy that will have significant repercussions for the rest of the world. It’s not currencies we should be worrying about, but output and growth.

Richard Holden is Professor of Economics at UNSW.

This opinion piece was first published in The Conversation.