TRICK question: did China’s central bank intervene over the past week to weaken the yuan or to strengthen it? Given all the headlines about devaluation, weakening would seem the obvious answer. In fact, the opposite is true: it first tried to stand aside, giving the market more say in the yuan’s value, and then backtracked, intervening to stem the ensuing decline. The volte-face reveals much about both the oddities of China’s economy and the difficulty of reforming it.
Every morning, marketmakers such as the big state-owned banks submit yuan-dollar prices to the People’s Bank of China (the central bank). It then averages these to calculate a “central parity” rate, or midpoint. Over the course of the day, the PBOC intervenes to keep the exchange rate from straying more than 2% above or below the midpoint.
In theory, it is the marketmakers, not the central bank, that set the midpoint and thus the trading band. In practice, the PBOC gets marketmakers to submit rates that will yield its preferred midpoint, irrespective of market sentiment (state-owned banks are pliant, after all). Critics in America and elsewhere have long alleged that...
from The Economist: Finance and economics http://ift.tt/1DPZVG7
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