A vendor holds 10 Yuan notes as she gives change to a customer at a market in Beijing, August 12, 2015. China shocked global markets on Tuesday by devaluing its currency after a run of poor economic data, a move it billed as a free-market reform but which some experts suspect could be the beginning of a longer-term slide in the exchange rate. (Photo: Reuters)
The International Monetary Fund welcomed Beijing's newly announced system to value the country's currency, saying it will allow market forces to play a greater role in the nation.
China cut the yuan's value against the dollar for a second day Wednesday, sending ripples through financial markets and raising fears that the currency could fall further.
After Tuesday's devaluation Chinese authorities said they were seeking to push market reforms in a one-time move.
Officials say they will now use the previous day's close, foreign exchange demand and supply and the rates of other major currencies to decide the daily rate around which the Chinese currency can trade.
The IMF said the step could be a boon in the long run.
"The new mechanism for determining the central parity of the renminbi (yuan) announced by the PBC (People's Bank of China) appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate," an IMF spokesman said in a statement.
"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," the statement said, adding that China "can, and should" achieve a floating exchange rate within two to three years.
"The exact impact will depend on how the new mechanism is implemented in practice," the spokesman said.
China has been criticized by some for keeping its currency undervalued to gain a trade advantage for its exports.
Beijing also seeks to have the yuan included in the IMF's basket of special drawing rights (SDR) basket reserve currencies.
The new change has no "direct implications" in the measure used for creating that basket, the spokesman said.
"Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the renminbi were included in the currency basket going forward."