The People’s Bank said it made the move in an effort to listen to the markets more than it has done when setting the fix. There’s been downward pressure for some time on the yuan, so in a sense China is just letting it fall from an artificially high level.
This in turn would help China gain IMF recognition of the yuan as a reserve currency in its own right, which fits with the country’s long held ambition to join the top table in global affairs. Developed, mature economies don’t have to peg their currency rigidly to the dollar, after all.
Politics may not be the only reason though. In hard economic terms, the main beneficiary of the currency fall will be Chinese exporters, whose trade took an 8.3% hit in July compared to the year before. The devaluation may be a sign of panic about the country’s economic slowdown, which some believe is more severe than reported by the Chinese authorities.
Economists at Fathom Consulting, for instance, believes that GDP growth was actually less than half the most recent official figure of 7%, pointing to the commodity price drop as evidence of a slump in demand. At the same time, China's battle to calm its volatile equity markets doesn't exactly inspire much confidence in either its economic health or the state's management thereof.