A cheaper yuan will make Chinese exports cheaper by boosting overseas sales, one of the key drivers of growth during the communist giant's remarkable growth story over the past three decades, but which have recently shown signs of weakening.
    
Effective from yesterday, the daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies, the People's Bank of China (PBOC) said.
    
Following the change, the central parity rate of the RMB or the yuan weakened sharply by 1,136 basis points, to 6.2298 against the US dollar compared to 6.1162 Monday, down nearly 2 percent.

The PBOC's move marked the biggest drop since China reformed its currency system in 2005 by unpegging the yuan from the US dollar. The nearly 2 percent plunge was the biggest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates.
    
The PBOC defended the move citing a strong US dollar and sharp appreciation in the RMB real effective exchange rate as key considerations behind the policy change.
    
The PBOC said the RMB's central parity has deviated from its actual market rate "by a large extent and for a long duration," which has "undermined the authority and the benchmark status" of the central parity system.
    
Chinese authorities said the change would help drive the currency toward more market-driven movements. The move also signalled the government's growing worry about slow economic growth. A shift toward a weaker currency could help flagging exports, analysts said.

 

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