First published: Nikkei Asian Review, 28/02/14
In the last several days, while the world’s attention was focused on headlines coming out of the Ukraine, financial markets were taken aback by the abrupt weakening of the Chinese yuan against the U.S. dollar.
The fall was not large, but broke a long-term trend of managed appreciation in which the yuan had been hugging the top end of a narrow, plus-or-minus 1% fluctuation band. Although the operations of the People’s Bank of China, the country’s central bank, are not transparent, markets have been accustomed to its close and consistent management of the exchange rate. Why, then, did the PBC cause the yuan to change direction suddenly?
Like so many things involving China, views tend to be binary: Either the PBC’s actions were totally benign and merit little further comment, or there has been a major change in exchange rate policy toward using depreciation as a tool to boost exports and stimulate growth. Unsurprisingly, actual situation is more ambiguous….:“more:”