China devalued its currency the yuan by the most recorded at one sitting since 1994. The move is to enhance the market orientation of the yuan, China’s central bank said.
The People’s Bank of China stated on Tuesday it had cut its daily reference rate for the yuan against the U.S. dollar by 1.9 percent, the biggest one-day drop since China aligned its official and market exchange rates in 1994. Every day China’s central lender sets a midpoint for the yuan against the U.S. dollar, allowing the yuan to trade by as much as plus 2 percent or minus 2 percent of the daily midpoint.
Describing the move as a “one-off adjustment”, the central bank stressed: “Currently there is no basis for persistent depreciation [of the yuan].”
Starting from Wednesday, the bank will also set the “daily fix” which it said was a reference to “the closing rate of the interbank foreign exchange market on the previous day”.
This change not only reflected “the enhancement of the market-orientation [of the yuan], but also the key role played by market demand and supply in the formation of exchange rate,” the central bank added.
Some investment analysts believe making the yuan’s exchange rate more responsive to market forces could also be a way of boosting China’s slowing economy.
In July Chinese exports declined by 8.9 percent year-on-year, compared with a median estimate of a 1.5-percent decline, the financial news service Bloomberg reported.
Official Chinese news agency Xinhua also quoted analysts saying the new measures on the yuan’s valuation could support the case for the currency to be included in the basket of reserve currencies – known as the Special Drawing Rights (SDR) assets – of the International Monetary Fund (IMF). The Washington-based financial institution is carrying out one of its periodic reviews of its SDR assets.
IMF said in a statement it “welcomes” the latest move of the Chinese authorities, but added, “the announced change has no direct implications for the criteria used in determining the composition of the basket [of currencies]”.
