What China’s big RMB statement means

" Despite the best of policy intentions and sound macroeconomic reasoning the final outcome will still depend on its execution and market reaction."
Raymond Yeung, Senior economist, ANZ

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In fixing the US dollar/Chinese RMB rate at just 6.5646, the People's Bank of China has clearly stated its willingness to establish a flexible exchange rate regime, moving away from its interventionist stance of just a few weeks ago.

The level was half a per cent lower than the currency's last official close in Chinese markets, suggesting the PBoC may begin to consider offshore market after-hour movements when making future decisions.

As China continues to run a current account surplus, a weaker exchange rate could help convert foreign earnings and inject more liquidity into the economy.

Conversely, the decision is likely to increase market speculation of further deprecation in the RMB, leading to significant instability and the risk of a repeat in the Chinese equity market rout experienced of mid-2015.

Despite the best of policy intentions and sound macroeconomic reasoning the final outcome will still depend on its execution and market reaction.

Raymond Yeung is a senior economist at ANZ