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A biker pedals past the People's Bank of China as the country's central bank tries to manage the yuan currency after its surprise devaluation last week. Photo: EPA

By not telegraphing its intentions to devalue, then claiming its move had nothing to do with weakening the yuan, the People’s Bank of China veered from the modern-era path of ever-increasing central bank transparency.

Expect more surprises in the future. When China moves to a free-floating currency regime, policy risk and unpredictability will be among a limited number of tools at the PBOC’s disposal to protect the yuan from excessive appreciation.

There is a term for this approach, coined by Hong Kong’s former monetary chief, Joseph Yam, about a decade ago: constructive ambiguity.

The renminbi is not cheap by conventional measures. Indeed, it is slightly expensive on a purchasing power parity (PPP) basis.

The problem is that it would be trading well above its PPP, the same way other currencies routinely do, if it were not repressed. That’s just a no-brainer. What other major economy has huge trade surpluses, high growth and yields similar to Australia’s?

What China doesn’t have is a risk-free sovereign rating. And like Japan - another big economy hooked on mercantilism – it will probably be smart enough not to get one.

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