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To stimulate its slowing economy
It’s believed that China has devalued its Yuan to give a push to its economy that is believed to be heading for a slow down.
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To make its products more competitive
By devaluing its own currency, China can make its products more competitive and so help maintain its economic growth.
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Because Chinese exports fell by 8.3% in July
As the figures showed that Chinese exports fell more than 8% in July, the Chinese government became more concerned about giving a boost to its exports, which led to the step of the devaluation of its currency.
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China’s manufacturing sector is contracting
China’s Manufacturing Purchasing Managers’ Index (PMI) fell to 47.8 in august. A reading below 50 reflects a slowdown in growth. China might have devalued its currency to push its manufacturing sector.
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China might be trying to float its currency
China has always been criticized for keeping its currency under tight control. Some economists interpreted the devaluation move as a step towards floating its currency. (See Why do countries devalue their currency?)
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Because the dollar rose
China’s currency tracks the dollar’s move because the country still manages the exchange rate within a range against the dollar. As the dollar rose in 2016, China had to devalue its currency to keep its products competitive in other countries.
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To make the country’s financial system more market oriented
China’s central bank spokesman said that the devaluation move has the goal of making the financial system more market oriented. This means that China might be moving towards a freer market where the government doesn’t manipulate the price of its currency that much. (See What caused the Asian Financial Crisis of 1997?)
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Sluggish demand in the US and Europe
China might have devalued its currency to battle the sluggish demand in both Europe and the United States.
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To remove some of the pressure on foreign reserves
China’s foreign reserves have fallen from $315 billion to $3.65 trillion. Some economists believe that the country is trying to reduce the pressure on its foreign reserves since China spends a lot to keep the exchange rate of its currency constant.
