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Foreign exchange market

Adjustment of yuan to test PBOC skills

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SCMP Reporter

THE yuan has been reassuringly stable against the US dollar since the single-tier exchange rate was adopted on January 1.

Reassuring, because the People's Bank of China, the central bank, cannot handle wild swings in the currency at a time of macro-economic adjustment to rein in a chaotic economy.

A volatile currency could disrupt reforms implemented from the new year, as well as investors' financial planning.

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But investors remain nervous over how long the current level of about 8.7 yuan to the greenback can be sustained, given the country's high inflation rate and trade deficit.

Foreign investors will say the current rate, which is determined to a limited extent by market forces under the central bank's so-called managed float system, is hardly the currency's true value.

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Some believe the rate is heavily supported by the central bank.

The conventional view is that if market forces were truly given full play the yuan would head downwards. The conservative viewpoint predicts a dip to nine or 10 yuan to the dollar and the more daring observers suggest 12.

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