Mainland policymakers have been saying since February that two-way swings in the yuan are the "new norm". A surprise surge in the currency shows that they mean it.
Twelve-month non-deliverable forwards, which traders use to speculate or hedge, strengthened 0.9 per cent against the US dollar this week, their biggest advance since January 2012.
The rally follows five months of declines that investors attributed to an effort by the People's Bank of China to weaken the yuan and fend off speculators who were anticipating a continuation of a five-year rally.
Just as traders got used to a declining yuan in recent months, the currency changed direction again after the government reported the mainland's trade surplus almost doubled and the central bank set the reference exchange rate yesterday at the strongest level since March.
The PBOC's efforts to inject volatility and reduce speculation are gaining traction as currency strategists from Barclays to Westpac Banking disagree on whether the yuan's strength can last.
"The move is more about mixing it up and increasing volatility, just as they said they would," said Edmund Harriss, investment director at Guinness Atkinson Asset Management. "I see the yuan continuing to trade that way."
The PBOC raised its yuan fixing by 0.42 per cent to 6.1451 per US dollar in the past three days, including a 0.22 per cent increase on Monday that was the biggest since October 2012. The spot rate, which is allowed to fluctuate 2 per cent above or below the official quote, rose 0.14 per cent yesterday to 6.2315 in Shanghai, China Foreign Exchange Trade System prices show.
The yuan has lost 2.9 per cent this year, the worst performance among major Asian currencies. It started to slide after it hit a two-decade high in January as the central bank warned that it may take measures such as imposing taxes to prevent speculative money from flowing into the country.
Two-way capital flows would become the "new norm" for China and the exchange rate was likely to be more volatile, the foreign-exchange regulator said in February.
Policymakers doubled the yuan's trading band around the central bank's reference rate in March as part of plans to give the market a greater influence in determining the exchange rate.
The currency's rebound this week has been met with diverging opinions among analysts on whether the yuan's weakness is ending.
The central bank's fixing on Monday diverged by the most this year from the level Westpac's model had predicted, suggesting a "fairly clear shift" in the PBOC's bias toward capping the weakness of the yuan, Singapore-based currency strategist Jonathan Cavenagh, wrote in a note.
Cavenagh said he was "turning more upbeat" on the yuan after recent data showed the economy was improving.
Exports climbed 7 per cent from a year earlier in May, compared with growth 0.9 per cent in the previous month. That left a trade surplus of US$35.9 billion, almost double the figure for April, as imports unexpectedly fell 1.6 per cent.
BNP Paribas and Credit Agricole turned bullish on the currency at the end of May.
Mirza Baig, head of Asia foreign-exchange and interest-rate strategy at BNP, recommended on May 27 that his clients buy the yuan.
Frances Cheung, head of Asian rates strategy at Credit Agricole, advised the same.
At Barclays, strategists are unconvinced. "Looking ahead, we see the currency to remain at the current level with some room for further depreciation if growth continues to disappoint," Barclays economist Jian Chang said.