SETTING the yuan free to float with supply and demand on semi-official swap centres is seen by analysts as a drastic, high-risk move leading to a sharp fall of the currency in both swap and black markets.
A People's Bank of China official says the move seeks to preserve foreign exchange reserves, used by the Chinese government to support the yuan in swap centres before March.
Hongkong Baptist College senior lecturer in economics Tsang Shu-ki says it may be a desperate attempt to resolve the yuan's depreciation: ''They may try to let the value currency to reach an equilibrium itself.
''But I think it's dangerous. Nobody knows where the equilibrium is.
''The right equilibrium should not be inflationary. If it is, it is just like a breather and the yuan will fall again shortly.'' In the context of an overheated economy, it is poorly timed, he says: ''Inflation and the yuan devaluation together form a spiral - a vicious circle.'' He says devaluation will lead to imported inflation, which in turn will bring about further devaluation and apparent stability of the past few months has proven artificial.
''Thus any equilibrium will be fragile. There is not a level that it can sit for long,'' Mr Tsang says.
