China's long march to currency reform takes a step forward

China's currency devaluation is a step in the long march to a more open regime for the yuan, analysts say, but authorities will need to further loosen their controls to promote long-term growth.
The central bank on Tuesday unveiled a near two percent devaluation of the yuan, saying the move was part of broader economic reforms aimed at moving towards a more flexible exchange rate.
The suddenness and scale of the devaluation in a normally stable unit rocked global financial markets, as investors took it as a sign the world's second-largest economy is performing worse than revealed, and sparked worries China had fired the first shot in a currency war.

It also compounded jitters over China's financial health after a debt-fuelled stock market bubble burst in June, following a 150 percent surge in the previous 12 months.
China's central bank soothed markets by setting the daily reference rate of the yuan -- also known as the renminbi (RMB) -- against the US dollar marginally higher today, ending an almost five percent fall over three days.
Analysts cheered the move towards a more market-based Chinese currency, but said other reforms had become more urgent as the Asian giant seeks a more sustainable growth model in the face of a slowing economy.

"Reducing overvaluation of the RMB is a welcome change that eliminates one source of unnecessary self-inflicted pain," the Asian Development Bank's chief economist Shang-Jin Wei said Friday.

ANZ Banking Group's chief economist for Greater China, Liu Ligang, hailed the move as "very important" but said more reforms, such as freer capital flows, liberalising interest rates and more allowing financial products to hedge against risk, were still needed.
If the bank had acted sooner, the impact on the economy would be "more obvious", he told AFP.
Still, there are worries the move could set off a "currency war" as regional neighbours and other emerging market countries face pressure to devalue to stay competitive.

Asia-Pacific currencies this week suffered their biggest two-day selloff since 1998, during the Asian financial crisis, while Russia's ruble slid to a six-month low.
A disorderly devaluation could hamper Beijing's push for greater global stature for the yuan and the government's pursuit of a bigger say in world finance, typified by its role setting up two new multilateral banks for Asia and the BRICS nations, which also include Brazil, Russia, India and South Africa.