For analysts, the PBOC appears willing to let the market find its feet and not intervene. The result is that the yuan posted its biggest daily gain against the dollar since its revaluation in July 2005, with the central bank staying true to its weekend pledge that it would allow greater currency flexibility.
Many agree that only tomorrow will the markets see how far the yuan will go, and thus get a sense of how much the PBOC will allow the yuan to rise in one day.” Few in fact expect the Chinese currency to rise as much as it did today. Indeed, by late afternoon, the yuan was trading near 6.815 after banks that shorted US dollars had to cover their positions before the end of the day.
After announcing an end to the peg on Saturday, the PBOC yesterday stressed that a substantial appreciation in the currency was "not in China's interests" and that the exchange rate would remain "basically stable".
Beijing’s move comes one week before the G20 summit in Toronto, which include the world’s top economies, plus the European Union.
For years, Western powers, including Japan, have accused China of keeping its currency artificially low, demanding that its trading be liberalised. With its recent move, Beijing earned appreciation and positive comments from governments around the world.
In China too, markets reacted positively to the announcement. In Hong Kong, the Hang Seng jumped 3.08 per cent with property shares, financial institutions and airline companies leading the way.
On the mainland, the key stock index rose 2.9 per cent to its highest close in three weeks, as markets anticipated that Beijing would allow the yuan to strengthen, signalling the government's confidence in the economy.
In Shanghai, the Composite Index also rose with airlines major gainers, as investors anticipated a reduction in US dollar-based costs for aircraft and fuel. Property shares also went up because a rising yuan is likely to boost investments and sales.