Yichio Wang writes: The People’s Bank of China (PBOC) has set its official guidance rate down by almost 3%, from 6.21 to 6.39 yuan per dollar, the lowest point in almost three years. Much of this was accomplished in one day with a decline of 1.9% (see chart below). It also changed the way it calculates the reference rate around which the yuan is allowed to trade in a two percentage point band. Last week, China’s currency dropped by a cumulative 4.4% against the U.S. dollar before recovering to trade very near the target.

This move has been explained by PBOC as a key reform that allows the currency’s value to be more responsive to market forces. China has been urging the IMF to include the yuan in the basket of the Special Drawing Rights (SDR), in order to boost international use of the yuan. As China is being accused of controlling its currency, this free-market reform can help China to have the yuan join the IMF reserve currency group.

The devaluation also suggests a growing worry about the growth after China’sexports tumbled 8.3 percent in July. A weaker currency can make Chinese exports cheaper and more competitive, while many other efforts to boost the economy seem useless.

Moreover, in order to keep the exchange rate stable, PBOC has to sell its dollar holdings to bolster the yuan’s value, which in turn offsets the effect of easing policies. As a result, China’s currency reserves have decreased $315 billion in the year to $3.65 trillion in July. Therefore, the currency devaluation could lower the cost of stabilizing the exchange rate and enhance the effect of monetary policies. One off for China?