China's large and surprising devaluation of the yuan is rippling through financial markets. The devaluation could have an impact on the price of commodities and the exports of U.S. companies.

Why has Beijing acted now?
Industrial production, investment and retail sales data for July were weaker than expected, while at the weekend figures showed Chinese exports tumbled 8.3% in July, their biggest drop in four months. After a string of weakening output growth figures going back to last year, the authorities have come intense pressure internally to address the slowdown with a dramatic policy shift.
Why focus on the currency’s value?
The dollar has appreciated over the past year in anticipation of the US raising interest rates for the first time since the financial crisis. Since the yuan loosely tracks the dollar, it has been dragged higher – keeping its differential with the greenback roughly the same, but at the expense of making the country’s goods dearer compared to regional rivals, especially South Korea and Japan. That has hit Chinese exports badly. Now the US Federal Reserve is close to its first rate rise in seven years, potentially pushing the dollar to new highs, the situation is set to worsen from China’s point of view.

What has the central bank done exactly?
On Monday, the People’s Bank of China set its daily “reference rate” for the yuan at 6.2298 to $1, compared with 6.1162 yuan – in effect 1.86% lower. That triggered a further fall in the currency markets. As the authorities pick the mid-point from the previous day as the basis for the next day’s reference rate, they were forced to devalue again or risk ignoring market forces. Choosing the former, it set the rate at 6.3306, fractionally weaker than Monday’s market close. The spot rate has responded by falling another 1.6% on Tuesday, likely forcing a further devaluation.
The currency moves are the biggest one-day falls in 20 years, and in particular, since China reformed its currency system in 2005. Back then, it unpegged the yuan, also known as the renminbi (RMB), from a strict tie with the dollar in favour of a looser tracking policy.

The successive devaluations follow a further shift in policy that means the bank will now expand the criteria used to calculate the daily fix – the rate at which it determines the currency’s value each morning and from which it is in theory allowed to move 2 percentage points in either direction, although in practice the moves are much smaller.

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