IMF approves China's yuan for benchmark currency basket

Chinese exporters and China's battered economy stand to gain an advantage, albeit temporary, with the People's Bank of China (PBOC) setting the daily midpoint for the yuan or renminbi at RMB7.0039 to $1.00 on Thursday, the weakest level since April 21, 2008.

The yuan's midpoint stood at RMB6.9996 to $1.00 on Wednesday. On Monday, PBOC set the yuan's daily midpoint at RMB6.9225 to S1.00 before markets opened. This was the yuan's weakest level since Dec. 3, 2018, and led to a market panic and selloff that pushed Wall Street to its worst percentage declines this year.

PBOC allows the yuan to fluctuate up to 2% higher or lower than the daily midpoint level to manage volatility.

Some analysts claim the continuing weakening of the yuan vis-à-vis the U.S. dollar is another attempt by China to boost exports in support of an economy that grew at its slowest rate in a quarter century during the first quarter of the year.

A devalued yuan makes China's exports more inexpensive and, therefore, more competitive against goods from other countries. On the other hand, it also made China's imports more expensive, adding impetus to its ongoing import substitution campaign.

Chinese banknotes
Chinese 100 yuan banknotes in a counting machine. Research shows that $1.2tn in capital flight have left countries like China and Russia to offshore havens Reuters

The yuan has weakened for four straight days and investors worry about the currency weakening even further next week.

A number of analysts believe China's devaluation of the yuan Monday is just the start of a currency war that will worsen trade tensions with the Trump administration.

China, however, seems to have signaled its intent not to engage in a currency war against the U.S. by setting the midpoint or reference rate of the yuan at a tolerable RMB6.9996 to $1.00 on Wednesday.

Wall Street seemed to take heart in the news PBOC governor Yi Gang indicated China won't use the yuan as a tool to cope with external disturbances such as trade disputes. Yi also said the yuan exchange rate is now at an appropriate level, and is in line with China's economic fundamentals and market demand and supply.

PBOC followed-up Yi's statements by setting the official midpoint reference for the yuan at RMB6.9996 Monday morning. The Trump administration then labeled China a currency manipulator Monday afternoon.

This article originally appeared in IBTimes US.