PBoC’s true intention

Today morning, the PBoC took a major decision to improve the pricing mechanism of the daily fixing rate. According to Societe Generale, there are two reasons behind the PBoC's today's announcement:

• 1) The nine-month delay of the IMF's decision whether to include the RMB into the SDR basket encourages China to implement further reforms, especially those that may lead to substantial short-term volatility. This change will increase RMB's chance to be included.
  
  
• 2) In the short term, the market will most certainly help the RMB play catch-up on the depreciation trend of other EM currencies, since the RMB barely moved versus the dollar in the past year. This would help the struggling Chinese economy.

Especially, the recent export data were much weaker than expected, indicating ever more obviously the selfinflicting pain of a strong RMB. Further, SocGen states this change as a positive reform effort. Both the real and nominal effective exchange rate of the RMB appreciated close to 15% in the past 12 months. 

SocGen argues, "If the RMB were more flexible, this would not have been the case. The new framework will allow the market to help the RMB de-link from the strong dollar trend, provided it is the market's view that the RMB should not move with the dollar."