There are two main plausible explanations for the yuan rate's recent developments. First, China’s leaders have promised to allow markets to do more to determine prices, including in the foreign exchange market. A widening of the trading band to plus-or-minus 2% had already been planned, although without a specific time frame. With the National People’s Congress, China's parliament, having gone into session March 5, it is conceivable that the central bank was simply preparing the ground for an announcement and trying to move the yuan a little lower.
Second, the bank may also have wanted to halt the “carry trade,” which is just another name for currency speculation. This is a practice in which state-owned enterprises and other Chinese entities, rather than hedge funds or professional speculators, have been especially active. It involves borrowing dollars from banks, mostly in Hong Kong but also in Singapore and elsewhere, and bringing them to China to lend at significantly higher interest rates, then taking advantage of a rising yuan to lower repayment costs when the loans mature.
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