The Chinese yuan took one of its biggest hits in a decade Monday, falling 0.5% per dollar on the first trading after the country announced a policy change. On Saturday the People's Bank of China widened the trading band for the yuan from 1% to 2% a day.
"They want to tell speculators that the one-way bet is over," says David Pilling, Financial Times Asia Editor, referring to the billions of dollars in leveraged bets made on the assumption that China's currency could only keep rising.
China's new currency policy is also an example of incorporating more market discipline as the country tries to rebalance its economy away from an investment-and export-led model to one more tied to domestic consumption.
So are we one step closer to seeing the yuan freely traded, and could it become a reserve currency in the not-so-distant future?
Pilling, who's also author of the new book Bending Adversity: Japan and the Art of Survival, thinks that's a long ways off. He says China would have to open its capital accounts, allow interest rates to move freely and develop a deep bond market that people trusted, which would require arbitration and the rule of law.
"There are too many of things not in place for people to really to trust the renminbi as a reserve currency," says Pilling.
Pilling has more to say about the Chinese economy, including its slowing growth and first-ever default in the corporate bond market earlier this month. Check out the video to find out more, and see why he says there is a sense of "a controlled explosion going on" that Chinese authorities need to keep control of.
Follow The Daily Ticker on Facebook and Twitter (@DailyTicker)!
More from The Daily Ticker