SHANGHAI - Chinese authorities have responded to the dramatic fall in the Japanese yen and other Asian currencies in recent weeks by tightening their grip on the yuan and beating back market pressure for the Chinese currency to appreciate.
The central bank has repeatedly stated its intention to reduce forex market intervention, and market trends have borne out such rhetoric for much of the last year.
But the People's Bank of China (PBOC) has stepped up its interventions in recent weeks to head off yuan appreciation amid fears its Asian neighbors may resort to competitive devaluations to bolster their exports.
"In characteristic PBOC fashion, when things are uncertain and unclear, they basically keep dollar/renminbi within a range," said Claudio Piron, head of emerging Asia foreign exchange and fixed-income strategy at Bank of America.
In a break with typical practice, the PBOC has guided the yuan slightly weaker over the last two weeks, despite a fall in the dollar versus the euro.
Typically the PBOC sets stronger midpoints in response to a fall in the dollar index, which tracks the greenback's value against a basket of currencies. The basket is heavily weighted towards the euro.
Analysts and traders say the break with precedent is a response to the recent decline in Asian currencies. The yen fell 16.9 percent from October through Monday, while the Korean won dropped 3.6 percent from Jan 15 through Monday.
After touching a record high of 6.2124 versus the dollar on Jan 14, spot yuan fell 0.35 percent to a 2013 low of 6.2342 on Monday, though it had recovered somewhat to 6.2294 by Tuesday's close.
Chinese traders say the recent depreciation has occurred despite robust corporate demand for yuan.
"Client orders for yuan are still pretty large, and there is still appreciation pressure. But the midpoint seems to be following Asian currencies with short-term depreciation," said a trader at a large commercial bank in Shanghai.
In addition to using the midpoint, the PBOC has stepped up its direct interventions in the market since early December.
Traders have consistently reported large dollar purchases by state banks that they suspect are being conducted on behalf of the central bank.
"The PBOC is back to intervening in the FX market - to the net tune of USD 34bn in Q4 2012," Standard Chartered economist Stephen Green wrote in a note to clients on Monday.
In a market with average daily volume of nearly US$14 billion (S$17.3 billion) in the first three quarters of 2012, such intervention is far from overwhelming.
But a few days of large-scale interventions in mid-December sent a clear signal to the market that the PBOC will not tolerate overly rapid appreciation. Once expectations for intervention become entrenched, traders police themselves.
"Market positioning is relatively cautious right now. Everyone is guessing when (the big banks) will come out to buy (dollars) and how much they will buy," said the Chinese bank trader.
Most analysts still appreciate moderate appreciation for full-year 2013, but at a slow pace.
Standard Chartered predicts the yuan will rise 2.1 percent for full-year 2013, reaching 6.10 at year-end. HSBC is less bullish, predicting an 0.8 percent gain to 6.18. Most other forecasts fall within this range.