According to conventional wisdom, the US economy is recovering significantly faster than other advanced economies, growth is gaining greater momentum and the dollar is strengthening.

However, markets are increasingly volatile. In early June, the Dow Jones Industrial Average, or DJIA, still exceeded 18,200 while the Shanghai Index was close to 5,200. Nevertheless, only a few days ago, the DJIA plunged below 16,000. Global markets also followed in these footprints and Shanghai's A-share index fell below 3,000.

[By Jiao Haiyang/China.org.cn]

Markets remained anxious worldwide until China cut interest rates for the fifth time in nine months, along with reserve ratios. In the West, US turmoil was attributed to China's devaluation. In reality, US market analysts have been anticipating correction for a long while.

Why China changed the yuan's parity

On August 11, the People's Bank of China (PBOC) made a change to its central parity of the yuan against the U.S. dollar in order to better reflect market conditions. While the move was characterized as "dramatic," the net effect was a de facto devaluation of 1.87% relative to the US dollar.

Some saw the PBOC's decision as still another signal that China's growth deceleration is worse than anticipated. Yet, China's rebalancing seems to be proceeding as anticipated in the medium-term, which means significant near-term volatility.

Others argued that the decision was the opening shot in a "currency war" that would spread internationally. However, jumpstarting exports and growth by less than 2% devaluation would be grossly inadequate. Besides, China's rebalancing means a move away from net exports and investment.

Still, others saw the PBOC's decision as an effort to comply with IMF conditions to include the yuan in the special drawing rights (SDR) currency basket. As the pressure is on the yuan to weaken, the idea of having greater exchange rate flexibility is understandable.

Indeed, the move toward a more market-determined rate is precisely what the IMF and the US Treasury have been asking for. Depreciation is not the objective of the Chinese exchange-rate policy. Rather, it is subject to China's huge rebalancing.