BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/26
The underlying causes of the yuan’s depreciation are the strong dollar and the PBoC’s gradual shift to the use of a multi-currency basket to track the yuan’s external valuation. Following the announcement of the Brexit result, the central bank said that it planned to keep the yuan’s exchange rate “basically stable.” While exchange rate stability is a fairly loose term, it is clear that yuan exchange rate flexibility will increase with the opening up of China’s financial markets to the world. Increased exchange rate volatility in this case is a positive signal that China is progressing towards a floating yuan. The trend also increases China’s need to enhance communication of its exchange rate policy.
Yuan-dollar onshore and offshore exchange rates: CNY (Shanghai) and CNH (Hong Kong)
Source: Macrobond