China weakens yuan amid economic and reform boost

China’s central bank on Tuesday devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and boost the world’s second-largest economy.

The surprise move marked the biggest drop since China reformed its currency system in 2005 by un-pegging the yuan — also known as the renminbi (RMB) — from the greenback.

The People’s Bank of China (PBoC) set its daily reference rate for the yuan at 6.2298 to $1, compared with 6.1162 yuan the previous day, effectively 1.86 percent lower.

The change came amid speculation China is preparing to widen the trading band for the yuan for the first time since March 2014 from its current two percent.

The range is calculated from a central fixing point each day. Before Tuesday, Chinese officials said they based it on a poll of market-makers, but the PBoC’s move means it will now also take into account the previous day’s close and other factors.

Beijing has kept a tight grip on the value of the yuan on fears fund outflows and inflows could build financial risk and reduce its policy control.

But it is also seeking to reform its yuan policy in an effort to be included in the International Monetary Fund’s basket of “special drawing rights” (SDR) reserve currencies.

“A reasonable adjustment of the RMB’s value is good for China’s exports and also good for the RMB to be admitted to the SDR,” Liu Dongmin, director of international finance research office at the Chinese Academy of Social Sciences, told AFP.

“But most importantly, this marks key progress for RMB exchange rate reform since 2005 and a major step for RMB marketisation,” he said.

Beijing keeps the yuan stable compared to other major global currencies and a two percent move in its value is dramatic — before Tuesday’s announcement it had traded within a roughly 0.4 percent band for four months.

– Supply and demand –

China’s currency has been a key sticking point with the US, which argues the yuan has been kept “significantly undervalued” to make exports more competitive.

Beijing’s market intervention has also been a stumbling block in gaining admittance to the IMF’s SDR club, now comprised of the US dollar, Europe’s euro, British pound and Japanese yen.

The Washington-based fund said this month “significant work” still needed to be done for the yuan to be considered before its next review in November.

The PBoC described the sharply lower rate as a one-off move, though it did not use the term devaluation, saying the weakening in the currency reflected a new method of calculating the daily price.

The bank will now “comprehensively consider the supply and demand of foreign exchange” as well the latest international market rates for foreign currencies to set the fixing, according to a statement.

Analysts said data showing a slump in exports over the weekend could also have prompted the move, which should make Chinese goods cheaper overseas.

Exports, a key driver of the country’s growth, plunged 8.3 percent year-on-year in July, customs said Saturday, spelling more worry for the economy.

China’s gross domestic product expanded 7.4 percent in 2014 — its slowest rate since 1990 — and has slowed further this year. It grew 7.0 percent in both of the first two quarters, in-line with the government’s annual target for 2015.

With China’s economy already slowing, analysts said a weakening of the currency was long overdue.

“The RMB exchange rate deviated greatly from the market (consensus) before, so the one-off correction of two percent today is big,” Li Daxiao, an analyst from Yingda Securities, told AFP.

On Tuesday morning, the yuan was quoted at 6.2570 to $1.0, down sharply from Monday’s close of 6.2096, according to the operator of the national foreign exchange market.