Equity markets across the world made handsome gains after China announced plans to make its currency, the yuan, more flexible against the dollar. China on Saturday said it would allow its currency to appreciate against the US dollar.

Market analysts said China's move would go a long way in lifting the global economic sentiment that has been under the weather due to the Euro crisis.

In a statement on Saturday, China's central bank said: "In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments situation in China, the People's Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility."

So why is this such a big deal? And why are some economists still sceptical about the goodness of the Chinese move? But more importantly why does China deliberately keep its currency undervalued?

Some economists feel that China's deliberately undervalued currency costs India billions of dollars annually in growth. Other world economies, like the United States, are even worse hit.

Currency manipulation is one of the schemes which China has used to give their exports an unfair advantage. A recent report by the Economic Policy Institute in the US found that an increasing trade deficit to China, a decrease in US export capacity to China and mounting foreign debt have caused $2.4 million jobs to be lost or displaced.

Beijing uses currency manipulation to maintain the value of its currency, the yuan, at an artificially low value, which makes its exports much cheaper and its imports more expensive.

China keeps its currency (yuan) undervalued with respect to the US dollar by buying dollars in the open market. China, which runs a huge trade surplus, can afford to buy dollars in the open market to keep the demand for dollars high, and push the dollar price upwards relative to the yuan. This keeps the yuan undervalued.

Exports are the Chinese engine of growth. The lower the value of the yuan, the more advantageous the situation is for Chinese exporters. So today if one dollar is equal to 7 yuans and a Chinese exporter sells a shirt for 10 dollars, he gets 70 yuans. However, if the value of one dollar were to be only 5 yuans (after the yuan is allowed to reach its real value), the exporter would only get 50 yuans. Thus, to give its exporters an unfair advantage in the world market, Beijing has lept the yuan undervalued.

China has already flooded various markets -- including the Indian market -- with cheap goods as its artificially undervalued currency makes its exporters very cost-competitive. If the value of the yuan were to appreciate, Chinese goods would no longer be cheap enough to compete with goods produced locally in these markets that China invades.