China pulled back the veil on its new currency regime a little further today, appearing to engineer a fall in the yuan to make clear its vow of flexibility did not include one-way bets for appreciation.
Big Chinese state-owned banks kept the yuan in check, a day after its biggest rise since the currency was revalued in 2005, and the Foreign Ministry said change would be gradual, indicating the yuan's appreciation will be far slower than the pace demanded by critics in the West.
The two-way movement in the yuan is not great by the standard of freely floated currencies but is rare in China, where until this week the central bank had squashed intraday volatility via intervention on most trading days.
China has started to relax its control over the yuan ahead of this weekend's G20 summit of world leaders in Canada, breaking a two-year dollar peg that had been a lightning rod for critics who say the currency is undervalued and gives Chinese exporters an unfair trade advantage.
Analysts say the move shows that China is serious about increasing the flexibility of its exchange rate.
Under its new freedom, the yuan rose more than 0.4% yesterday - the biggest rise in a day since its landmark revaluation in 2005. It also came close to hitting its trading limit of 0.5%, an amount the currency can move either side of a reference point set each morning by the central bank.
Today, the yuan fell just over 0.2%.
The fall disappointed many market players, who had initially thought the central bank's decision to set the reference rate in line with Monday's close was a sign that it was willing to let the currency strengthen further.
State-owned banks stepped in to the market by mid-morning and aggressively bought dollars, traders said, suggesting authorities want to control the pace of the yuan's appreciation.
The People's Bank of China, the central bank, made no secret that it would not allow the yuan to appreciate too fast when it announced the currency reform at the weekend.
The Foreign Ministry reiterated today that any change in the yuan would come only gradually.
By allowing for greater ups and downs day to day, though, the central bank will move a step closer to its long-stated aim of developing a more mature market in which companies learn to hedge against foreign exchange risks, part of China's overall efforts to develop Shanghai into a global financial centre by 2020.
