Effect of rattling the yuan

FROM July 2005 until this past December, China's yuan appreciated steadily. But then the yuan fell unexpectedly, hitting the bottom of the daily trading band set by the Peoples' Bank of China (PBoC) for 11 sessions in a row. Though the yuan has since returned to its previous trajectory of slow appreciation, the episode may have signalled a permanent change in the pattern of the exchange rate's movement.

As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the yuan remained under upward pressure. Short-term capital flows had little impact on the direction of the yuan's exchange rate.