The announcement over the weekend that China would move to a more flexible exchange rate regime is unlikely to see the RMB move to a gradual path of appreciating against the dollar as was the case until 2008. Instead, the authorities are intent on showing the market that the RMB can depreciate against the dollar and other currencies, as well as appreciate.
In the first day of trading post the announcement, the PBOC moved the reference rate for the currency by 0.43% against the dollar, fully reflecting the market move on the day. In yesterday's trading the RMB was almost 0.2% weaker against the dollar. If the PBOC reflects this move in the reference rate today, it would genuinely be allowing market forces to set the rate - politically fantastic. But it would also be telling the large amount of speculative money parked in RMB that the currency is no one-way bet.
The PBOC has total control here. If, as I expect, there is little or no upward pressure on the RMB because speculative holder selling will at least match new buying, then the RMB will move little. If it were to fall in the coming weeks then the market would suddenly see unknown downside to set against what was only ever going to be modest appreciation. A rush for the exits could be the result. The RMB would be falling entirely due to market forces, and the shrill voices in Congress would have nothing to say.
If the RMB appreciates too fast the PBOC can still intervene. But they are likely to do so in a way that produces a haphazard movement with both up and down days, to ensure the market gets the message that the RMB is no one way bet against any other currency. Once again those accusing China of currency manipulation will have a hard job proving their case.
As the Wimbledon tennis championship begins, it is game, set and match to China.
Disclosure: No stocks mentioned