Poor economic data sees China devalue yuan

China's central bank made the decision to devalue the country's currency on Tuesday (August 11th), describing the action as a 'free-market reform'.

The People's Bank of China's official guidance rate was cut by two per cent before the market opened, pushing the yuan down to 6.2298 per US dollar, forcing it down to its lowest point since 2012 from 6.1162 on Monday.

According to the bank, its decision marks a change in methodology to make the currency more responsive to market forces.

"Since China's trade in goods continues to post relatively large surpluses, the yuan's real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations," the central bank said.

Therefore, it felt it was necessary to improve the yuan's midpoint pricing to satisfy the needs of the market.

Analysts are divided over the significance of the bank's decision to devalue the currency, as the move appears to backtrack on recent policy aimed at maintaining a strong yuan - policy that supported boosting domestic consumption and outward investment.

A weaker currency could reflect current market demand, but a strong yuan serves a greater purpose, as it forces economic transformation toward consumption and away from low-end manufacturing.