China devaluated Yuan by 2 per cent largest since 1994

August 11, 2015

In line with economic slowdown in China, the People’s Banks of China devalued yuan by 2 per cent against the US dollar.
Devaluation was done based on a new way of managing the exchange rate that better reflected market forces which differs greatest from the one introduced at the start of 1994.
Devaluation was done with an aim:

To encourage export through devalued yuan.
To support domestic demand and to help Chinese firms to borrow and invest abroad.
To encourage foreign firms and governments to make greater use of the currency.

Immediate Reason of Devaluation:

Exports tumbled due to weaker demand from its trading partners.
Steep drop in the Shanghai and Shenzhen stock markets in late June and early July.
Weaker consumer demand within China.
Sales dropped in Automobile sector.

Methodology
Chinese currency is not freely tradable its movements are tightly controlled by the government. Every morning People’s Bank of China sets a midpoint for the yuan’s value against the dollar and other major currencies.
This midpoint is set in window of as much as 2 percent higher or lower than the previous day’s value, but usually the change is in tiny fraction of 1 percent.
Usually People’s Bank of China (PBOC) manages the exchange rate through an official midpoint using formula based on a basket of currencies, but under the new methodology which sets midpoint based on market force has devalued the yuan greater since 1994.
Note: Initially China’s currency was fixed peg to the dollar that ended in 2005. Since then, it has risen more than 25 percent against the dollar, strengthened even more against the euro and the yen.

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