Timing of China's currency reform move baffles watchers
Thursday's showcase of its missiles and fighter jets may have earned the Chinese leadership some wows but not market confidence.
The latter has been deeply eroded by the ataxia the world has witnessed in the reform of its currency, which tops the country's agenda.
The doubts no longer centre on whether the cadres can lead the country out of its economic ills, but what is going on in the corridors of power
It is a confidence crisis, not an economic one.
The introduction of a more market-determined price for the yuan on August 10, when a stock market fire was still being put out, was puzzling.
Unlike the stock market crash and the subsequent intervention, which was largely unexpected, yuan reform and the resultant devaluation has been the game plan for a long time. The introduction was only a matter of time.
Why do it when the market crash has aggravated capital outflows and when Beijing needed the money and policy ambiguity to support the A-share index?
By liberalising the price determination of the yuan to reflect trading in the previous day, Beijing was put on the defensive on two fronts - its stock index and currency.
The economic stimulus theory does not stand. China's exports have been weak on demand not price; and the devaluation has been capped below 4 per cent so far.
Another explanation is the leadership's eagerness to get the International Monetary Fund to endorse the yuan as a global reserve currency.
The new system will move it a step closer to being a "freely usable" currency - one of the two IMF selection criteria.
Yet, five days before the August 10 reform, there was every sign that the IMF decision would be delayed to September next year, with an IMF report saying the yuan still lagged behind rivals on key metrics.
In that case, what was the hurry?
A theory widely circulated in Beijing is that it was an attempt to front-run the US Federal Reserve's much talked about rate increase this month.
Policymakers were understood to be concerned that a higher dollar rate would fuel new pressure on the yuan, making the reform more difficult to pull off.
At the same time, an early move would allow months for the new system to be fine tuned and worked out, providing more data and making it a more convincing case for the IMF to endorse the yuan a year later.
The decision may be costly. However, cost is no object for the state agenda in China. The market interventions by the People's Bank of China (PBOC) to support the yuan are all natural.
Yet, to the puzzlement of the market the PBOC announced some measures this week that will defeat the agenda to make the yuan a reserve currency.
On Monday, the central bank ordered banks to set aside 20 per cent of foreign exchange forward sales in reserve for 12 months, regardless of the contract maturity.
That means the banks have to lock up 200,000 yuan for a year with no interest after entering into a contract that promises to sell 1 million yuan in three months' time
On Wednesday, the new reserve-requirement mandate was extended to include almost everything, including currency options and some swap contracts.
This makes it very costly for traders to bet on swings in the yuan. While relieving the PBOC's burden in shoring up the currency, it is tantamount to barring forward contracts against the yuan.
The result is a withering forward market, leaving the spot market and offshore market as the only price provider for yuan.
In that case, how can Beijing convince the IMF that the yuan is a "freely usable" currency?
These apparently spontaneous and uncoordinated moves are a far cry from the army-like approach the market has been used to seeing in China's currency management.
Yet, the official most responsible for that has been silent. PBOC governor Zhou Xiaochun has not said a word about the yuan since the reform was launched.
Not that he's not around. Two weeks ago, he gave interviews to various mainland media, talking about the reform of government policy banks.
The world is now wondering who is behind the steering wheel.