Sudden drop in RMB a shift toward market-driven rates, not a growth boost, experts say

After several days of turbulence on the foreign exchange markets, the Chinese currency, at least for now, looks to be heading for a period of calm.

When the People's Bank of China took the decision to let the yuan slide by 1.9 percent on Aug 11 - the biggest daily fall since 1994 - it prompted fears of currency wars and global deflation.

Many also thought the move was designed to boost China's flagging exports so the government hits its 7-percent growth target in the second half.

There was also speculation the government was trying to pre-empt a much-anticipated hike in the US interest rate by the Federal Reserve Bank in September.

Increasingly, the official explanation that the move was a step toward a more market-oriented exchange rate mechanism is gaining acceptance as the most valid.

It has since emerged that the International Monetary Fund and Chinese financial chiefs had reached broad agreement in May that the markets should play a bigger part in setting the value of the yuan.

Just days before the PBOC made its move, the Washington institution also circulated a report among staff members concluding that reform was needed, which many now believe was the final catalyst in the decision that shocked world markets.

Some even believe that as early as November, when the IMF has its next board meeting, it may recommend that the yuan becomes a global reserve currency and joins the dollar, the euro, the UK pound and the yen in the SDR, or special drawing rights, the supplementary foreign exchange reserves held by the IMF.

The yuan would be the first currency to be accepted into the basket since the euro in 1999, and it would be a key step toward becoming a major international currency.

The IMF said in a statement on Aug 19 that if it was to give the green light, the currency would not join the basket until September 2016 at the earliest.

Its managing director Christine Lagarde said in March it was not a question of if the yuan joined the SDR but only when.