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More transparent in Chinese exchange rate is in the right direction

Comments on Alice de Jonge "Fans of a more open China should welcome the devalued yuan", 13/08/2015

I believe that China will move further in the direction of letting the market play a greater role in determine its exchange rate, even though the PBC has strong power to intervene when it is necessary.

The announcement that the midpoint of the Chinese Yuan and the $US is the close point of the previous day makes the process more transparent in general and the operation closer to market forces in particular. These steps by the PBC is likely to further facilitate China’s desire and objective to internationalise its currency to commensurate with its economic status in the world.

It will be interesting to see how the PBC will determine the midpoint of its exchange rate when there is a clear conflict between the previous day’s close and any information point to a likely significant impact on the Chinese currency that has newly been available since the close.

If it is mechanically following the previous day’s close, people may trade according to the new information to profit from that. And that will likely force the PBC to consider some deviation from the previous day’s close. It may need to assess how much to deviate and in what directions, so the new midpoint is much more aligned with market forces.

PS: in response to comments on the potential impact on Australians and New Zealanders' properties by John Hill:

It is probably less likely for them to sell right now as compared to reduced demand/buyers due to relative movement between the Chinese Yuan and the Aussie dollar.The property bubble may not burst as a result, but its further inflation may be somewhat more checked.

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