China’s 2015 yuan reform sent shock waves through financial markets, now it’s ‘learning its lesson’

In August 2016, the People’s Bank of China devalued the yuan by nearly 3 per cent against the US dollar over two days

This week, it pledged to guide institutions to provide firms with risk management services based on the principals of ‘actual needs’ for holding foreign currencies

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The strategic importance of yuan internationalisation is much more pronounced today because of ongoing US-China tensions and potential financial decoupling. Photo: Roy Issa

Published: 1:30pm, 12 Aug 2021Updated: 10:01pm, 12 Aug 2021

China’s central bank has shed some light on its latest foreign exchange policy six years on from a devaluation of the yuan that was meant to be a free-market reform but instead sent shock waves through global financial markets.

The People’s Bank of China (PBOC) has pledged to guide financial institutions to provide businesses with exchange rate risk management services based on the principals of “actual needs” for holding foreign currencies and balanced “neutral risk” to prevent sharp currency volatility.

“In the next step, [the PBOC] needs to use currency policy tools reasonably, strengthen macroprudential management of cross-border financing, guide expectations through a variety of reasonable methods so that companies and financial institutions establish the concept of ‘neutral risk’ to keep the yuan’s exchange rate basically stable,” the PBOC said in its second quarter monetary policy implementation report released on Monday.

While larger two-way volatility will be the new normal in the yuan’s exchange rate, the PBOC is expected to step up its management of expectations in the market through moral persuasion and increased communication to prevent one-sided currency appreciation or depreciation.

“When the yuan’s exchange rate and market expectations fluctuate greatly, voicing immediate concerns in response to the market and through multiple channels to convey policy intentions prevented overshooting in the foreign exchange market, and protected the stability of the market,” the PBOC said.

To dampen market speculation that China will tolerate greater appreciation of the yuan to help combat surging commodity prices and imported inflation by launching a full-fledged liberalisation of its capital account, PBOC vice-governor Liu Guoqiang said in May that the existing managed floating exchange rate system remained “an institutional arrangement fit for China at present and in the foreseeable future”.

Earlier this year the PBOC also offset yuan-appreciation pressure by using macroprudential supervision to bring about adjustments of cross-border flows by banks and corporations.

New financial regulations were also introduced to encourage more yuan outflows while curbing borrowing that is repatriated onshore.

Having learned its lesson from the [2015 yuan reform], increased currency policy transparency has helped anchor sentiment in the yuan significantly

Ken Cheung Kin-tai