The move by China's central bank on Tuesday to change the mechanism for setting the daily reference rate for the yuan "appears a welcome step" as it should allow market forces to have a greater role in determining the exchange rate, the International Monetary Fund said on Wednesday.
"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.
"We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years," an IMF spokesperson said in an emailed statement.
Referring to the IMF's consideration of whether to include the yuan, officially called the renminbi, in its Special Drawing Rights (SDRs), the spokesperson said:
"Regarding the ongoing review of the IMF's SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward."
According to Wall Street Journal, devaluation of Chinese currency would help it increase its export and will pressure China's direct trade rivals, such as South Korea and Japan, to follow suit and let their own currencies fall.
"It raises risks of market volatility in other emerging market economies. More broadly it sends a signal to investors that policy makers in China and elsewhere are straining for tools to address the problem of slow growth," the daily said.
The New York Times explained that China took such a decision for its economy to remain on an even keel, keeping growth and employment high and for its currency to become globally pre-eminent, helping promote the country's diplomatic goals and solidifying the country's centrality to the global economy.