At the opening this morning, the yuan jumped initially after the People's Bank of China set the mid-point start to trade at a surprisingly strong 6.7980, slightly higher than the 6,79level it closed yesterday’s, the lowest since the 2005 revaluation when China’s central banks abandoned a fixed rated. However, soon Chinese state-owned banks stepped in to buy dollars so that the yuan went as high as 6.8229 on the day.
This has led traders to believe that the People’s Bank of China (PBOC) has adopted a new strategy. Rather than impose rigid rates, it is effectively limiting the market's ability to short dollar/yuan by using state-owned financial institutions to prevent the yuan from gaining too much.
Between 2005 and 2008, the PBOC intervened directly by buying dollars and keeping the yuan’s value low.
Either way, China’s central bankers want to keep the renmimbi on an even keel and not let it appreciate too much against the US dollar.
By contrast, the yuan was allowed to appreciate considerably in relation to other currencies, especially the euro, trading at 8.3764 at midday today from a close of 8.4325 the previous day.
Analysts believe that the apparent more liberal exchange regime will allow Beijing to lessen the impact of criticism that it is bound to receive at the G20 summit, set for this Friday in Toronto (Canada).
The United States and other Western countries have been urging China for years to let the yuan find its market value rather than keep it undervalued.
Now, only time will tell what the impact of the yuan’s partial liberalisation will be.
In the meantime, Beijing will have time to advance its own agenda, above all change quotas in the International Monetary Fund, to give China and other emerging nations more power.
As proof that yesterday’s euphoria was over, most Asian markets lost today. Although key stock indexes in Shanghai and Hong Kong did not budge, Tokyo lost 1.1 per cent, whilst Seoul and Taipei dropped by a few fractions of a percentage point.