Expectation management is key to the stability of the yuan, and the central bank should give priority to the offshore yuan market, because this is not only a highly free and liberalized market, but also an important venue where international speculators would try to attack or manipulate the exchange rate of the yuan.

Systemic risks like a new round of global currency devaluation and capital outflow could threaten economic stability and growth. In the past two years, the spree of short-term speculative capital and the RMB arbitrage rose and accumulated a lot of risks. A new global monetary management mechanism and a more stable global exchange rate structure are urgently needed.

The lens of government intervention in China has led foreign observers to misinterpret some of the most important developments this year in the foreign exchange market and the stock market.

The shifting exchange rate reflects the strength of the dollar, not weakness of the RMB. The two nations and business communities should focus on identifying the complementary sectors and products of the two countries and seeking a sustainable pattern of stable growth based on mutual benefit.

A long-term stable RMB exchange rate with a two-way volatility is conducive to maintaining the financial asset price, to preventing a large-scale capital outflow, to controlling foreign-debt risk, to reducing the cost and burden of debt financing and to stabilizing economic growth anticipation.

As China allows more market influence to determine the value of the RMB, the exchange rate will become more volatile. Allowing the market to determine the value of the yuan is precisely what the West has long sought, and it will serve global interests, whether China’s currency rises or falls.

Shrill forebodings of a return to ‘currency wars’ and irremediable U.S.-China trade quarrels are overblown – although the prognosis on this front is somewhat mixed. A small step backwards (the yuan devaluation on August 11th) might yet come to reflect the biggest leap forward in Asian economic, trade and financial regionalism in the years and decade ahead.

The 1.8% devaluation of the yuan has started a debate in China-watching circles about whether or not the People’s Bank of China is trying to make the RMB more market-determined, or trying to make boost its exports. Most likely, Beijing is allowing the RMB to find its feet before the IMF review in November.

Although the degree of depreciation could be determined by how the Chinese government weighs the advantages and disadvantages of RMB exchange-rate movement, market forces play a more important role, and investors must pay close attention to this.

The tremendous volatility of China’s markets has led to direct and indirect government involvement, which is ultimately a short-term fix. Beijing must re-commit to the opening of its financial markets and to a deepening of capital market reforms.