Reducing risks in yuan trading

A financial safety net should be established to prevent drastic exchange rate fluctuations and facilitate cross-border business

The yuan's recent drastic depreciation against the US dollar has underscored the need for China to set up an exchange rate stabilization mechanism and construct a financial defense framework to prevent drastic rate fluctuations and possibly damaging capital flows.

Since mid-February, the yuan's spot exchange rates against the dollar in the onshore and offshore markets have suffered continuous depreciation, changing the years-long one-way appreciation trend. The new round of deprecation was originally believed to be a result of rate interventions by China's central bank, however, the yuan's higher central parity than its spot rates in recent rate fluctuations indicates that recent depreciations did not result from the authorities' intentional interventions, but came from the impact of a fluctuation in global liquidity as a result of the US Federal Reserve's quantitative easing tapering.