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China timed its latest currency announcement brilliantly

Published by Business Insider on Sat, 12 Dec 2015

The People's Bank of Chinasuggested in an editorial on Friday that it could be time tode-peg the yuan from the dollar, and instead peg it to a basket of currencies.The posting gave no details about what the basket would include, or when these moves could be madebut did note that the new index will be "of great significance in changing how the world looks at the renminbi exchange rate."The de-pegging suggestion could be "a way for the Chinese government to manage two conflicting goals for its currencyits desire that the yuan be set by market forces and that it also be stable," reported Business Insider's Linette Lopez.But there's anotherbrilliant angle to all of this: the timing.Over the last few years, the fixation on the dollar spot rate has made things not so great for the PBoC. The yuan has appreciated significantly in trade-weighted terms thanks to its link to the stronger dollar. However, any sustained weakness in the currencyrelative to the dollar has often been interpreted as a devaluation, and has sent the market into a tizzy.In light of that, "the timing of this announcement is significant, on the cusp of tightening by the Fed, which could feed further dollar strength," suggestsCapital Economics' chief Asia economist Mark Williams."The world will be watching the renminbi more closely than usual over the days ahead. If the renminbi does continue to weaken, the key point is that this should not automatically be interpreted as devaluation or even depreciation if it is happening against a backdrop of dollar strength. The renminbi has lost ground relative to the dollar this year, but the PBoC says that is has appreciated 2.9% to the new basket (other baskets, including that from the BIS, say much the same)," explainsWilliams.Or, inother words, the "PBoC [bought] some more insurance against further dollar strength," write the Capital Economics analysts.SEE ALSO:14 incredible facts about TexasJoin the conversation about this storyNOW WATCH: Ian Bremmer: Angela Merkel is going to have a bad 2016
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