It's always awkward when one of the main actors on the stage doesn't follow the script that the rest of the cast is expecting. It's almost two months now since Beijing announced that it was to ditch the de facto currency peg against the US dollar it had been operating for the previous two years. At the time, the news was applauded by currency-watchers everywhere. According to general opinion, it was high time Beijing unshackled the yuan and allowed it to appreciate for the good of the Chinese economy. This view was reinforced in late July when deputy governor of the People's Bank of China, Hu Xiaolian, appeared to agree, declaring in a widely publicised speech that 'a more flexible exchange rate regime will help curb inflation and asset bubbles'. But in the foreign exchange market China didn't quite follow the script everyone else was expecting. Sure, the yuan initially strengthened against the US dollar, rising by almost 1 per cent over the next few weeks. But then the authorities' appetite for appreciation appeared to run out of steam, and this month the yuan began to weaken again, giving back more than half its gains against the US currency (see the first chart below). Predictably, the reversal elicited howls of protest from China-sceptics, who argued that June's move had been a cosmetic measure intended merely to stave off international criticism. Now Beijing was reverting to its old mercantilist policy of holding down the value of the yuan to boost exports. The complaints were given extra force by a sharp rise in China's trade surplus in July, leading some commentators to predict that Beijing was once again steering a collision course with Washington. But in recent days some observers have begun to suspect a more intriguing possibility: that Chinese officials are actually doing what they said they would do, and are managing the yuan's exchange rate against a basket of currencies rather than just the US dollar. This makes some sense. Between late June and early August the US dollar fell against a trade-weighted basket of currencies, so if the yuan were being managed against a basket of its own, it would have been expected to strengthen against the US dollar - as it did. But then last week the US dollar rebounded against its basket, so the yuan's recent weakness makes sense too. The only trouble is, if the yuan is really being managed against a basket, then either its composition is a mystery, or - as the sceptics allege - Beijing has little intention of allowing any significant trade-weighted appreciation. Certainly the yuan is not appreciating on a trade-weighted basis. As the second chart shows, since the PBOC's policy announcement in June the yuan has actually fallen by 2.3 per cent against a basket comprising the currencies of its main trading partners. There is another possibility, however. While China's foreign exchange mandarins certainly look at the yuan's value against a basket, they continue to manage the currency primarily against the US dollar, simply because that is still the currency in which almost all of China's foreign trade and the vast majority of its overseas investment is denominated. And while they intend to steer a gradual appreciation of the yuan, they do not want its ascent to be too smooth because that would encourage big inflows of short-term capital. So to create the illusion of genuine two-way risk, every so often they will engineer a short-term depreciation of the currency to deter speculators. As a currency policy, that would have the great merit of being both opaque and unpredictable, wrong-footing those expecting a measured appreciation as well as the sceptics. The news this week that China's official holdings of US Treasury debt fell by US$24 billion in June, and are now down by US$96 billion since last July (see the third chart), has caused no end of excitement. Yet if China is really cutting its holdings, there is no shortage of eager buyers. Yields on two-year bills - exactly what China is supposed to be selling - are at an all time low. And while China's direct holdings of Treasury debt fell by just over US$50 billion in the second quarter, debt held by London banks, largely on behalf of third parties, grew by more than US$80 billion. No doubt some of that increase is being held on behalf of Middle Eastern oil exporters, but it is likely much of it is held indirectly by Beijing in order to disguise the true extent of its exposure to Treasuries. Opacity and unpredictability once again.