China has been secretly struggling to stabilise the yuan

BEIJING: In early August, the yuan’s exchange rate broke through the psychological threshold of 7 yuan per US dollar.

While investors were still digesting the full significance of this event, US President Donald Trump’s administration startled the market by labeling China a “currency manipulator”.

The designation is absurd, to say the least, because China doesn’t meet the US government’s own criteria for being a currency manipulator. In fact, the decision by the People’s Bank of China (PBOC) to let the yuan fall below 7 per dollar had little to do with trade or currency wars.

Rather, it represented an important step by the PBOC toward reforming China’s inflexible exchange-rate regime.


True, the PBOC did intervene for a long time in the foreign-exchange market. During the 1998 Asian financial crisis, for example, it adopted a de facto peg of the yuan to the US dollar, which was a key factor in restoring stability to the region’s financial markets.

After 2003, the PBOC intervened to prevent the yuan from appreciating, because of fears that a stronger currency would hurt China’s growth. The Chinese authorities de-pegged the yuan from the dollar in 2005.

And following a temporary re-peg during the 2008 global financial crisis, China adopted an exchange-rate regime in 2010 that the International Monetary Fund classified as a crawl-like arrangement.


Since late 2014, however, appreciation pressure on the yuan has waned.

In August 2015, the PBOC tried to take a decisive step from a soft peg toward a floating exchange-rate regime by declaring that the central parity of the yuan’s exchange rate against the dollar would be determined by the previous day’s closing price.