NEW YORK (TheStreet) -- It has been less than a week since China devalued the yuan, and after some initial turmoil, foreign-exchange markets have seemingly settled down as investors and governments may have come to a tentative conclusion about China's motive.
Last Tuesday, the People's Bank of China surprised the world by announcing that it is devaluing the yuan by 1.9%. The PBOC said it would set the midpoint of a day's trading range at the closing value from the previous day. Then, the currency could trade with 2% of that value during the day.
Hence, the midpoint of the trading range would be set by the market and not by the central bank, as some had feared.
The International Monetary Fund said last week that it "cautiously" endorsed the move by the Chinese central bank, but cautioned that the "exact impact will depend on how the new mechanism is implemented in practice."
It is in China's long-run interest to see that the market-based approach works and that other nations in the world accept and come to trust what China is doing, although the Chinese still have a lot of work to do within their financial system. The collapse in China's stock market in June and the relatively ineffective way the Chinese went about to correct it is a case in point.
The Chinese are intent on bringing their financial markets up to a world-class standard and on making their country competitive globally. That is the long-range goal of China, and the devaluation was a step toward that goal, although many believed China had other motives to weaken the yuan. Two were to stimulate the economy as growth becomes slower and to boost exports.
But this small of a devaluation is insignificant in terms of stimulating exports. For example, the European Central Bank has conducted a poslicy of quantitative easing for more than one year that lowered the value of the euro vs. the U.S. dollar from around $1.39 to around $1.10, where it is now.
That is a decline of almost 21%, and yet exports have hardly budged, while Europe's economy grew by only 0.3% in the second quarter.
Another major item on the Chinese agenda is getting their currency accepted by the IMF as a reserve currency, along with the U.S. dollar, the Japanese yen, the euro and the British pound.
For China, achieving reserve-currency status would mean that the country had arrived as a global economic power. China's leaders had been hoping to achieve reserve-currency status around the start of next year.
On Aug. 4, the Chinese received a message from the IMF recommending that they wait until October 2016 before entering into the select group of reserve currencies. According to The Economist within this message, the IMF "hinted that the yuan is still too heavily controlled."
While China does want the yuan to become a reserve currency, the devaluation goes back to China's long-term goal to have a more market-based economy.
"For the PBOC, getting (reserve currency status) has never been just about prestige. Rather, it has been using this objective as a means to push for reforms that remove some of the policy distortions still hobbling the economy. Introducing a truly floating exchange rate is an essential part of its program," The Economist wrote.
The devaluation is more market orientated and should lessen the concern other countries have about how the PBOC will manage the yuan.
This article is commentary by an independent contributor.