China has decided to have a more market approach to its currency. In the past, the Chinese Government has intervened directly to determine the value of the Yuan by buying and selling the currency to stabilize it. This was to avoid severe devaluation of not more than 2% from its initial daily value.
The new approach, though, means that the communist country will now allow the market forces- supply and demand, to dictate the value of the Yuan. Immediately after that announcement, the currency devalued.
This is not a bad thing for China though as it means the Country’s exports become cheaper compared to other Countries giving China an upper hand in the markets and as critics put it, an unfair advantage.
The Government of China pleaded its innocence, though, claiming it was just complying with demands from the International Monetary Fund(I.M.F), and the US Treasury to allow market forces to determine the value of the Yuan.
As well as also trying to make the Yuan an official currency on the international markets and an additional choice for international transactions to the dollar.
The situation was captured well by the L.A Times editorial which wrote. “If China wants to elevate the Yuan as a global currency, it has to stop surprising the world with dramatic shifts in monetary policy.”
To help steady the Yuan without buying and selling, China has also been trying to balance the use of the Yuan in-house, and also avoid too much money from leaving the country, which a tricky balancing act.