In the decade since China shocked the world with a surprise devaluation of the yuan, the nation’s exchange-rate regime has steadily shifted towards market-based – yet still managed – pricing, and analysts say the era of burning through massive reserves to defend the currency is firmly in the rear-view mirror.
Armed with lessons from the past, Beijing now employs a wider arsenal of tools to manage volatility, they added, with the key challenge for the coming decade being whether the yuan can open the door wider to market pricing and secure a larger international role – without destabilising swings.
“Ten years ago, faced with intense yuan-depreciation pressure, the central bank relied on its foreign reserves, depleting nearly US$1 trillion to support the currency – a situation unlikely to recur today,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
“Since then, Beijing’s toolkit for managing the exchange rate has become far more diverse, reducing reliance on direct reserve use and helping keep foreign reserves relatively stable.”
The reform helped pave the way for the yuan’s inclusion in the International Monetary Fund’s (IMF’s) reserve currency basket, while also triggering capital flight and sharp volatility, with China’s foreign exchange reserves dropping from nearly US$4 trillion in 2014 to about US$3.2 trillion by 2017.
