Fixed on the fix

An unstable yuan is part of China's new normal

China has given investors something new to worry about: an unstable and unpredictable yuan. For much of the past decade, the renminbi's steady appreciation against the US dollar was one of the few certainties in global markets. Now the currency has reversed course, the struggle is to guess how far it will slide.

Investors are scrutinising the yuan's official exchange rate against the US dollar, announced by the People's Bank of China (PBOC) each morning. For the last few days the so-called fix, which marks the central point of the currency's trading range, has been broadly stable. But that follows a weakening in the first half of last week, which helped trigger a global market sell-off.

The fixation with the fix is itself surprising. The PBOC downgraded the measure last August, as part of a surprise mini-devaluation that rattled the financial world. Central bank officials said future fixes would be based on the previous day's closing rate, giving markets a greater role in determining the renminbi's value.

Reality has proved different. The PBOC has tended to set the official rate at a stronger level than implied by the previous day's trading, according to an analysis by Rhodium Group. The implication is that the central bank is trying to slow the currency's slide.

More recently, officials have tried to shift the focus away from the dollar by publishing the yuan's value measured against the currencies of China's main trading partners. Some think the central bank now aims to keep the currency stable against this trade-weighted index. Even if that's the case, though, it is still far from clear what level the PBOC is targeting, or why.

All of this assumes that China's economic planners are still in control of the currency. But the $108-billion drop in China's foreign exchange reserves in December suggests capital is still fleeing the country. The uncertainty is causing turbulence in previously tranquil markets: in Hong Kong, the interbank borrowing rate denominated in offshore renminbi leapt by nine percentage points to 13 per cent on January 11 as currency supplies dried up. The unstable yuan looks here to stay.