China's yuan now resembles a freely floating currency

China's yuan has come to more closely resemble a freely floating currency despite low levels of daily volatility, a report by a researcher at the Federal Reserve Bank of New York concluded. The report, written by John Clark, a senior researcher at the New York Fed's emerging markets and international affairs group, said that daily changes in the yuan fixing have become "quite predictable and quite responsive to market forces".
The fix, also known as midpoint, is set by the People's Bank of China (PBOC) prior to market opening every trading day. Fluctuation in the exchange rate of the yuan against the dollar is limited to 2 percent above or below that level. The PBOC has long pledged to liberalize the yuan, including promoting capital account convertibility, but has so far retained tight control.
According to Clark's report, published this month on the New York Fed's website, the daily fix has provided "directional cues" for trading in recent months, while official intervention in the domestic foreign exchange market has diminished. "Our analysis can be interpreted as pointing to a number of ways in which the Chinese currency's behavior has come to more closely resemble the short horizon random walk behavior typically found in freely floating currencies," he wrote.
The report said daily volatility in the yuan, however, remained "unusually low" compared with currencies of most advanced economies. The study's cover page says the views are those of the author, distributed "solely to stimulate discussion" and "do not necessarily reflect the position" of the New York Fed or Federal Reserve System.
China's central bank said in its third-quarter monetary policy report published on Friday that two-way volatility of the yuan against the dollar had become more obvious, adding that the market environment had switched to "neutral". For years, the Chinese currency had been seen as a one-way bet. In 2016, the currency lost about 6.5 percent of its value against the dollar, the biggest annual loss since 1994. However, the yuan has rebounded this year, gaining about 4.7 percent against the dollar.