In the first quarter, the RMB spot exchange rate against the US dollar fell from 6.0539 on December 31, 2013 to 6.2180, a drop of 1641 basis points, or a depreciation of 2.64%. This figure is close to the 2.9% appreciation of the RMB spot exchange rate in 2013.

　　If one were to rank the most impactful news events for China's financial market in the first quarter, the significant depreciation of the RMB would undoubtedly win by a large margin.

　　According to statistics, in the first quarter, the RMB spot exchange rate against the US dollar fell from 6.0539 on December 31, 2013 to 6.2180, a drop of 1641 basis points, or a depreciation of 2.64%. This figure is close to the 2.9% appreciation of the RMB spot exchange rate in 2013.

　　After a quarter of depreciation volatility, market expectations for the RMB's trajectory have diverged. On March 17, the People's Bank of China announced an expansion of the daily trading band for the RMB against the US dollar to 2%, further advancing the market-based formation mechanism of the RMB exchange rate.

　　The depreciation in the first quarter of this year is the largest and longest sustained depreciation of the RMB exchange rate since the exchange rate reform, largely changing market expectations for the exchange rate direction.

　　Initially, the market generally believed that the RMB depreciation was the central bank's move to curb the influx of arbitrage funds. Therefore, although the expectation of unilateral RMB appreciation was somewhat weakened at the time, overall, the market still believed that the appreciation of the RMB against the US dollar was the dominant trend.

　　This expectation reversed on March 7. On that day, affected by the first default in China's bond market, large-scale liquidation signs began to appear in the commodity market, and the RMB exchange rate suffered a heavy blow, with an intraday decline of 0.12%, and market panic began to ferment. At the same time, what surprised the market was that the central bank did not take obvious measures to support the market. The central parity rate on March 8 was very "respectful of the market" and even fell further to 6.1312. The central bank's clear "market-following" attitude completely divided market expectations for the RMB, and the central bank's tolerance for RMB depreciation was clearly beyond market expectations.

　　Some market analysts believe that this round of depreciation is due to the central bank's regulation, aimed at curbing the large influx of arbitrage funds, while breaking the long-standing unilateral appreciation expectation in the market, providing conditions for further expanding the daily trading band of the RMB against the US dollar, and advancing the market-based formation mechanism of the RMB exchange rate. In mid-March, the central bank announced an expansion of the daily trading band for the RMB against the US dollar from 1% to 2%. This is the central bank's third expansion of the RMB exchange rate fluctuation range after 2007 and 2012. Expanding the band means further enhancing the two-way floating elasticity of the RMB exchange rate and further establishing a managed floating exchange rate system based on market supply and demand. In addition, some believe that against the backdrop of a weak Chinese economy, a moderate decline in the RMB is also conducive to stimulating China's exports, forming a certain positive effect on China's export sector to some extent.

　　If expanding the band is the institutional construction the central bank needs to achieve, then diversifying the RMB appreciation expectation is the more important market psychology construction the central bank has achieved.

　The unilateral appreciation expectation of the RMB has always plagued the regulatory authorities. The continuous appreciation of the RMB has led to exchange rate differentials and domestic-foreign interest rate differentials that continuously attract overseas funds to enter the country through various channels, and the unilateral market greatly limits the independence of the central bank's monetary policy. For a long time, the continuously increasing foreign exchange funds have become an important channel for "Chinese-style" currency issuance, limiting the operational space of monetary policy and even damaging the independence and effectiveness of the central bank's monetary policy.

　　Through this round of depreciation, the market's expectation of unilateral RMB appreciation has now been diversified.

　　Recently, a survey conducted by Nomura Securities showed that 67% of respondents believe the RMB will continue to weaken in the next three months, mainly those from the money market and corporate groups; another 33% believe the RMB will appreciate in the next three months, most of whom—mainly Asian banks, European and North American hedge funds—believe that Chinese authorities have achieved their goal of reducing speculative positions.

　　As for the effects of this round of depreciation in stimulating exports and curbing hot money, they are more intuitive: since the RMB depreciation, some foreign trade merchants have reported increased orders, but specific export data still need to wait for the release of March import and export data.

　　The effect of curbing hot money can be seen from the liquidation of financing commodities in the market, and as early as early March, a grassroots survey by China Merchants Bank already showed that some arbitrage positions had incurred losses.

　　The two-way fluctuation of the RMB exchange rate has been realized within a quarter. Although it is a further advancement of the marketization of the RMB exchange rate formation mechanism, the exchange rate risks brought about by it require more related RMB derivative products to lock in.

　　Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of the National People's Congress and former deputy governor of the People's Bank of China, also said at the recent China Development Forum: "The RMB has entered a stage of two-way fluctuation. All enterprises and banks should have this awareness of risk locking and should better use hedging tools."

　　In addition to hedging, etc., the assets and liabilities of some enterprises need to be adjusted accordingly. In the era of unilateral RMB appreciation, many enterprises preferred the model of "asset localization, debt foreign currencyization" from a financial perspective, but two-way fluctuation of the RMB will pose greater challenges to corporate financial management.

　　However, from another perspective, two-way fluctuation is what makes a real market, conducive to discovering reasonable prices and more conducive to the optimal allocation of internal and external resources.