CHINA’S yuan is plunging to fresh lows in December, declining 1.3 percent so far this month, heading toward its worst monthly performance since February and set to close the year down more than 2 percent.

    But unlike February’s slide, widely seen as engineered by regulators, this time the collapse in the yuan’s value is driven by market forces, traders say, and the central bank is staying on the sidelines.

    Chinese traders turned sharply bearish on the yuan in late November, after the central bank made a surprise cut to interest rates, seen as a sign of easing to come and by extension downward pressure on the yuan’s relative value.

    Traders reacted to that policy move with predictions that the yuan might begin to slide in 2015, but subsequent events have overtaken them.

    Instead, the expected softening cycle is already well underway, as corporates seek U.S. dollars to hedge sliding neighboring currencies — in particular the Russian rouble — and at the same time hitch a ride on an ascendant dollar index, which has risen 12 percent since the end of June, and may accelerate as the Fed tightens its monetary stance.

    “This is a dollar strength story and the yuan moves are market-driven,” said Dominic Bunning, senior foreign exchange strategist at HSBC in Hong Kong. “We may see the yuan weaken in the coming weeks particularly if exporters hold back from selling dollars.”

    The central bank, frequently referred to as “Central Mother” by traders, has been relatively indifferent to increasing volatility in the market, which marks, after all, the achievement of a stated policy goal: adding more risk to a market once considered a one-way bet on appreciation.

    “The People’s Bank of China has drastically reduced its intervention in onshore yuan trading this year,” said Huang Yi, head of foreign exchange trading at Guangfa Securities.

    “If emerging market currencies continue weakening, the yuan is set to depreciate further,” Huang said.

    The People’s Bank of China’s strategy has not been completely hands off, however, because it still controls the midpoint guidance rate, from which the spot market can only stray in 2 percent on either side. While it has abstained from trading in the market to manipulate the spot value, it has also kept the midpoint firm, even strengthened it, to avoid setting off a panic, traders say.

    “The People’s Bank of China’s strategy has remained the same, keeping the yuan’s volatility within the government’s designated range,” said a trader at a major European bank in Shanghai.

    “But the strategy in the current context means the yuan will be allowed to depreciate, in contrast with the previous few years when the currency was allowed to appreciate.”

    Official data show China’s trade surplus stood at US$276 billion in the first 10 months of this year, but Chinese banks posted a surplus of only US$17.5 billion in their foreign exchange settlements for their corporate clients in the same period.

    Another set of data show the People’s Bank of China’s foreign exchange assets increased by 776.8 billion yuan (US$125 billion) in the first 10 months, well below the 2.14 trillion yuan increase seen in the same period a year earlier, as the People’s Bank of China reduces its intervention.

    Ma Jun, the People’s Bank of China’s chief economist, said over the weekend that the yuan would not fluctuate as sharply as other emerging market currencies.

    In another sign of market-driven decline, the yuan’s recent slide has been led by the offshore yuan market, which is not bound by the People’s Bank of China’s midpoint. (SD-Agencies)