The yuan anniversary that really matters is 2005, not 2015

Back in July 2005, China broke a decade-long peg to the dollar. The anniversary attracted little attention but set the stage for China's emergence as an economic superpower

China's sudden devaluation of its currency a year ago this week, dubbed the "yuanniversary" by traders, was an epic market shock.

The People's Bank of China weakened the yuan by almost 2 per cent on August 11 of 2015, a move that baffled many investors and has generated speculation ever since about whether financial authorities intend to devalue the yuan dramatically to boost growth.

Yet step back and pull out the long-angle lens, and a far bigger milestone in China's economic evolution comes into view. Back in July of 2005, China's central bank broke a decade-long peg to the dollar. It's an anniversary that attracted far less attention, but the move 11 years ago helped set the stage for China's emergence as an economic superpower.

Authorities pegged the currency back in the mid 1990s to stoke exports and economic growth, shortly after abandoning a dual exchange-rate system for imports and exports. Governments in the US and Europe criticised China for running up a huge trade balance by keeping its currency artificially undervalued in their view.

The peg was scrapped on July 21, 2005, and the PBOC allowed a one-time, 2.1 per cent appreciation, a decision welcomed by then-U.S. Treasury Secretary John Snow. "It was a day I will never forget," said David Mann, chief Asia economist at Standard Chartered Plc.

While that move shocked markets at the time, it's now viewed as a crucial and positive step that helped accelerate China's economic transformation. Doing so allowed the yuan to appreciate, fending off criticisms that it was being kept low just to aid exporters. Its gains also helped to address growing imbalances in the economy in the decade after.

And while trade hawks in the West have criticised China for using the yuan to keep its economy humming, the currency has strengthened more than 21 per cent against the US dollar since the end of 2005. That's the most in Asia after Singapore's dollar.

The results speak for themselves. Over the same period, China's gross domestic product has more than quadrupled to $10-trillion plus, the benchmark Shanghai Composite Index stock gauge has almost tripled in value and the nation's foreign exchange reserves, even after record losses in 2015, remain the world's largest at $3.2 trillion.

"In 2005, we were in a global supercycle, helped by an unsustainable credit boom in the west and China's industrialisation and urbanisation," Mann said. "In the last few years we have been seeing policy makers coming to terms with sluggish growth in the post credit boom west and east. China is easily the most dominant driver of global growth, accounting for a third of world growth even as it slows and transitions towards services and consumption."