Yuan Bears, Don’t Get Too Excited Just Yet

Many have been quick to speculate that the recent move by the People’s Bank of China to scrap the 20 percent reserve requirement for trading foreign currency forwards is a signal that the government intends to depreciate its currency. That narrative was strengthened on Tuesday as the PBOC lowered the yuan fixing rate by the most in eight months. 

One can probably assume that the PBOC wants to slow the recent pace of currency appreciation, which saw the yuan reach its strongest level since December 2015, but I would caution about misunderstanding the government’s intentions.

What is more likely is that the PBOC believes capital flight risks have diminished, as evident by the recent rise in foreign-exchange reserves, and the policy of yuan liberalization can continue at a slow and steady pace. 

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