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The base unit for the renminbi is the yuan, which is how the Chinese currency is most commonly referred to. The official ISO abbreviation for the yuan is CNY, but it is also commonly abbreviated in the forex industry as RMB.

The yuan had been pegged at 8.28 to the dollar since 1994. While China has been openly discussing scrapping the dollar peg for several years, many traders weren't expecting a move until later in the year.

The PBC declared that the new regime would be a managed floating exchange rate based on supply and demand in relation to a basket of currencies comprised of the U.S. dollar, euro, yen and the Korean won. The yuan s central rate against the dollar was then adjusted by just over 2% to 8.11. Keep in mind that the RMB exchange rate is quoted in dollar terms, in other words, the dollar is the base rate of this currency pair. A 2% positive revaluing of the RMB results in a 2% decline in the dollar rate versus the Chinese currency.

According to the PBC, the RMB will now be allowed to fluctuate up to 0.3% on any given trading day with the daily closing price then serving as the midpoint of the next day's trading range. That could mean as much as a 6% move in either direction in a month. However, the PBC is very unlikely to allow for that kind of movement and has in fact already intervened in the forex market to prevent the yuan from straying too far from 8.11. With over US$700 billion in currency reserves they certainly have the power to enforce their wishes and it's doubtful that forex speculators will be willing to test the resolve of the PBC in any meaningful way any time soon.

While the floating of the yuan, albeit tightly controlled, is a significant policy shift, the initial revaluing of the RMB is seen as largely symbolic. Chinese president Hu Jintao visits Washington in September and the modest revaluation may have succeeded in heading off a face to face showdown on China's exchange rate policy. Critics contend that the yuan is undervalued by more than 20%, affording China an unfair trade advantage. U.S. manufacturers have demanded as much as a 40% revaluation. A more significant move than 2% is needed to truly affect the massive trade imbalance between China and the U.S., so there will undoubtedly be calls for further RMB appreciation.

So where might the renminbi be headed longer term? One year non-deliverable forward contracts in Singapore rose to RMB 7.64 before edging higher again, suggesting scope for an additional 6% of RMB gains over

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