The Chinese yuan (renminbi) has been depreciating against the U.S. dollar since a week ago, reverting the trend of appreciation amid continuous fluctuation.

The exchange rate of the yuan against the dollar, which stood at 6.1053 on Feb. 17, fell for five continuous days from Feb. 18 to 25, pulled up slightly on Feb. 25, before retreating again on the day after to close at 6.1192.

As the People's Bank of China (PBC), China's central bank, still intervenes in China's foreign exchange market, [Set Up Company Hong Kong]there is reason to believe that its influence was the primary cause for the retreat of the yuan's exchange rate, though external factors, such as the U.S. Federal Reserve, may also have played a part.

The U.S. Federal Reserve announced that it would downsize its monthly debt increment to 65 billion starting from February. Also, the U.S. central bank is set to stop quantitative easing (QE) in the near future, as Janet Yellen's congressional testimony showed, which would lift the dollar's medium-long term interest rate. This would decrease the cost of carry, exerting pressure on Chinese yuan.

Domestically, China showed less momentum for short term growth in February. HSBC data show that China's February PMI declined to 48.2 from the January figure of 49.5, signaling a further contraction in production; MNI fell to 50.2 from 52.2 during the same period. More noticeably, in January M1 only grew 1.2 percent year on year, 8.2 percentage points less than in December, and 14.1 percentage points less than the growth record in January 2013.

These indices have shown that in China's real economy, the corporate sector may have been experiencing difficulties, resulting in less confidence in fixed asset investment. As a result, China's economic growth will slow further, which will make the yuan weaker in the international exchange market.

But such changes in secondary factors are still too weak to turn around the appreciation momentum of the yuan against the dollar. Therefore, the sudden depreciation is a result of the PBC's intervention.

Given that the PBC has a tradition of dollar purchasing to slow down the appreciation of the yuan, [Hong Kong Company Formation]it may have recently purchased more dollars to reduce market supply and push the US dollar to appreciate. The PBC may also have directly intervened in the dollar's central parity rate and forced the yuan to retreat.

There are three reasons why the central bank may have purposefully depreciated its own currency.

First, it wanted to cause losses to cross-border arbitrage, as a warning to speculators. China used to maintain a benchmark interest rate far higher than those of other countries, which, along with expectations of the yuan's appreciation, have fostered cross-border speculation.

Central state-owned enterprises and foreign trade-oriented companies, among others, have made huge gains because of this, causing the PBC to suffer, because the central bank was forced to buy in more dollars with the appreciating renminbi, meaning that the government will possibly suffer foreign exchange revaluation losses.

By intentionally injecting new uncertainties into the foreign exchange market in China, the central bank will likely scare off potential arbitragers.

Second, the sign indicates the central bank may be preparing to relax daily average volatility of the yuan's rate against the dollar. Before this measure is implemented, a sudden arbitrage-seeking capital influx will cause the yuan to appreciate dramatically, a situation the Chinese central bank does not wish to see.

Third, the central bank might be suppressing the shadow banking phenomenon by maintaining a high interest rate in the interbank market. This would require the yuan to depreciate in order to lower market incentives.

Over the past two years, risks have continued to mount in China's financial sector, as a result of excessive bank-trust cooperation, financial products and other forms of shadow banking. [Offshore Company Incorporation]The PBC has maintained a high interbank market interest rate, in a bid to encourage deleveraging commercial banks, and ideally, lower such risks.

The yuan's depreciation has reflected the central banks' intervention through market means. But judged from the present situation, two more potential issues still await solving.

First, how long will this round of the depreciation of the yuan last? Based on economic data, China's export growth in 2014 may still be robust, pushing the yuan to appreciate. But if the central bank keeps suppressing the market's intrinsic demand, would the yuan's exchange rate burst into a rebound once the PBC's intervention ends?

Second, will the PBC normalize such intervention measures? Even if the yuan maintains a slight appreciation trend against the dollar, will the PBC still, from time to time, cause the yuan to depreciate so as to squeeze the arbitrageurs, and develop the measure into the China's own version of the Tobin tax?

The central bank's new measure is certainly worth supporting, though it is bound to be short-lived. The intervention measures, which the central bank is confident in, are after all risky, since no one can intervene in the market forever.

Also, the cost of intervention is often shown in a suppressed finance market, such as the 20 percent reserve requirement and the actual negative deposit interest, seen in previous years.

This year should be a prime opportunity for the PBC to lower its intervention over the foreign exchange market in China, so that the exchange rate can remain volatile in both directions. The central bank should make the most of the chance, rather than indulge in clever intervention measures.