The RMB devaluation since late 2015 is arguably, in part, a market-driven but government-guided correction vis-à-vis the currency’s previous irrational appreciation. Between mid-2014 and July 2015, the RMB appreciated strongly against a trade-weighted basket of currencies. However, this appreciation was not based on any fundamental strengthening of the RMB, and was instead the result of Chinese regulators maintaining the USD to RMB rate at a steady level, even while the USD appreciated against most other major currencies. As a result, USD appreciation also forced the RMB to appreciate against other currencies.
To counter this irrational appreciation, on August 11, 2015, the PBoC announced a new mechanism of central parity rate formation that better reflected market movements. This new mechanism may be interpreted as a small step toward liberalization, but it is still accompanied by non-market interventions by the PBoC, presumably to avoid financial disorder that could ensue if the RMB were to over-devalue. Nevertheless, between August 2015 and May 2016, the RMB has weakened 6.8 percent against the USD, whilst FX reserves declined by USD 460 billion, in part due to outflows seeking stronger currencies and in part due to the government’s defense of the RMB.