The Chinese yuan has been the talk of the markets this week. The People’s Bank of China unexpectedly announced on Monday (Aug. 10) that it would make a “one-time correction” to the value of the country’s currency. The yuan promptly sank by 2% against the dollar the following day, sending global markets and currencies into a spin.
The central bank’s previous policy held the yuan at around 6.2 to the dollar regardless of the conditions. Some interpreted the bank’s one-time-correction comment as just that—a one-off change. So when the yuan’s reference rate was set lower on the two following days—by 1.6% on Wednesday and 1.1% on Thursday—analysts began to question the bank’s motives.
But today, the central bank raised its reference rate against the dollar by 0.05%, the first rise since it announced its new policy. That has generated even more confusion about the bank’s shifting policy on pricing the yuan.
But the central bank staying true to its original statement, which also emphasized that the “market will play a bigger role in exchange rate determination” in the future. There will no doubt be plenty of days on which the yuan weakens again, particularly as data show China’s economy is stumbling. But, as the central bank said at a press conference yesterday (paywall), it also means that the value of the yuan can go up as well as down.