China’s central bank has its eye on the bigger picture as it allows market forces to dictate speed of yuan declines

There are signs China’s central bank is letting market forces dictate the speed of recent declines in the yuan amid the ongoing US-Sino trade tensions, indicating that the exchange rate policy may be gradually shifting towards a “cleaner” style floating regime, analysts say.

Between late-2015 and mid-2017, the People’s Bank of China (PBOC) deployed draconian measures to limit sharp, one-way depreciation pressure on the yuan that was triggered from its August 2015 attempt to reform the exchange rate. It imposed capital controls, squeezed market interest rates and added a opaque “counter-cyclical factor” to the formula of the daily yuan reference rate.

But analysts believe that in the current bout of sharp declines in the value of the yuan, policymakers have refrained from intervening in the currency markets and imposing restrictions, underscoring a determination to push through new policies this time round to open up their markets and encourage foreign participation in its domestic equity and bond markets.

In May, Guan Tao, a former official at the State Administration of Foreign Exchange, said it was possible to have a timetable and road map for the currency to move towards a clean and volatile exchange rate. Before moving to a clean and volatile exchange rate in 2020, policymakers could initially move towards a managed yuan float that would entail no prior announcement of a so-called “floating trading band” and where the midpoint of the exchange rate was truly determined by market forces.