Central Bank devalues yuan in shocking move

folarin okunola

August 11, 2015 9:23 AM

The central bank said it had decided to allow market forces greater control over the yuan.

China's stock market has been struggling over the past few months.

According to various reports, the People's Bank of China allowed the yuan to depreciate by nearly 2% against the U.S. dollar on Tuesday, due to a surprise policy change that shook international currency markets.

According to CNN Money, the central bank said it had decided to allow market forces greater control over the yuan, and announced a major change in how the currency's daily "fix" or "midpoint" will be calculated.

The sudden devaluation is the largest ever in the past two decades, and comes amidst a recent drag in the country’s economic growth and increased stock market volatility. The move was announced before the market opened on Tuesday and it quickly rippled through global currency markets, raising questions over Beijing's timing and intentions.

The PBOC typically sets a daily midpoint for the yuan, around which the currency is allowed to trade within a 2% band. Until now, the central bank had total control over where the midpoint was set. Going forward, the midpoint will be based on the previous day's closing price.

"[Because] China is maintaining a relatively large trade surplus, [the yuan's] real effective exchange rate is relatively strong, which is not entirely consistent with market expectations," the bank said in a statement, according to CNN Money.

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