China's recent move to improve its exchange rate formation system marked the country's further step toward a market-oriented exchange rate system and the depreciation of the Chinese currency has been misinterpreted by some critics, experts said.
The People's Bank of China (PBOC) on Tuesday announced the decision to improve its central parity system, which is the starting point for daily forex trading, to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar. Following the decision, the Chinese currency, RMB, fell sharply in value on the following days.
"China's central bank took a potentially major step toward a more market-determined exchange rate," Nicholas Lardy, senior fellow at the Peterson Institute for International Economics (PIIE) , said in an article published on the think tank's website.
The action taken by China, far from being a step to manipulate its currency, is actually an effort to let the RMB fluctuate according to the dynamics of the exchange markets, said the expert. He expected the move could lead to greater volatility and two-way movement in the value of the RMB against the U.S. dollar.
China's move surprised the market and prompted the lowest valuation of the yuan since October 2012. The PBOC described the sharply lower rate as a "one-off" adjustment that has bridged the previously accumulated differences between the central parity rate and the market rate.
Daniel Rosen, partner of the consulting firm Rhodium Group, on Thursday said in a research note that the fact that China has cut interest rates to shore up the economy while the U.S. Federal Reserve is going to raise benchmark interest rate soon is forcing the RMB to abandon the "nominal rate stability" and to depreciate against the U.S. dollar.
