It looks like Beijing’s really trying to free the yuan here.
After expanding the yuan’s trading band by 1.9% yesterday, China’s new pricing mechanism has just lowered the daily fix by 1.62% to 6.3306 – its second largest cut in two decades.
Naturally, the offshore markets are beating CNY to a pulp, pricing in multiple coming devaluations as the renminbi falls another 2+% on top of yesterday’s 2.8% fall. Should this continue, dollar-yuan could easily break through its all-time high.
This is a good thing though. While everyone seems fixated on the “currency war” aspect of the move – Vietnam for example just responded to the devaluation with their own devaluation – the fact that the PBOC allowed its new pricing regime to let the yuan slide means that they’re really serious in letting the markets play a bigger role in its pricing.
The IMF for instance has lauded the move, saying:
“Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets.
We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years.”
As the Australian Financial Review reports, China – Premier Li, to be specific – had absolutely no plans of devaluing the yuan. Rather, what they were worried about was the “daily fix” itself, as fund managers who visited the PBOC recall:
“While explicitly ruling out plans to devalue the yuan, the PBOC officials did acknowledge there was a problem in how the currency was set, a process known as the ‘daily fix’.
‘They were fixated on the fix,’ says the fund manager. The issue was that the ‘fix’ had been consistently out of kilter with where the currency was trading on the markets – it is allowed to move 2 per cent either side of its daily level.
According to the fund manager, the PBOC were keen to see this gap narrow and for it to better reflect how the market was valuing the currency.”
Unfortunately, the PBOC seems to have a worse PR department than BP did during the oil spill. Rather than play up the move as a genuine effort to let the markets in – or at least further clarify their new pricing regime – they chose to just shut up and let their credibility go down the drain – again.
Photo: Japanexperterna.se