In fact, the devaluation last August was accompanied by the announcement of a more market-oriented mechanism for setting the yuan's exchange rate in the inter-bank market, with the daily fixing rate based on the previous day's closing price. That move, an important step in the Chinese currency's internationalization process, was a prerequisite for the addition of the yuan to the basket of currencies that determine the value of the International Monetary Fund's reserve asset, the Special Drawing Right.

But even when China attempted to create a more reliably market-based system, investors' response was skewed, with unfounded expectations of a substantial and consistent devaluation fueling speculation in international markets.

The subsequent attempt by China's State Administration of Foreign Exchange to stabilize expectations by declaring that the yuan would be valued against an undisclosed basket of currencies, instead of just the US dollar, failed to convince them. Short trades continued to rage offshore, putting the yuan under increasing pressure.

No doubt, China could have communicated its new exchange rate policy more clearly, a point that Fang Xinghai, vice-president of the China Securities Regulatory Commission, has admitted. But that does not mean the authorities, especially the PBoC, were being secretive or opaque in their decision-making. The real problem was a difference in communication style.

Recognizing this disconnect, the PBoC has been working vigorously to prevent further misunderstandings by designing policies that will safeguard exchange-rate stability, while taking care not to transmit any signal that monetary easing is on the cards. Even with inter-bank liquidity strained, the PBoC is refusing to lower the deposit reserve rate to release liquidity - in defiance of market expectations.

Instead, the PBoC is employing unconventional regulatory tools - such as short-term liquidity operations, standing lending facilities, and reverse repurchase agreements - to boost the money supply, driving the repurchase rate to a 10-year low. Clearly, even with external speculators breathing down its neck, the PBoC remains committed to stabilizing the exchange rate, while advancing its market-oriented goals. Investors should take note.

China's leaders have plenty of challenges ahead, and improved communication with markets could help them overcome those challenges. Fortunately, it seems China's leaders recognize this imperative, and are working to meet it.

Nonetheless, it is reasonable to wonder whether, if the current currency turmoil endures, Chinese policymakers' commitment to financial liberalization and currency internationalization will wane. One hopes that it does not come to that.

The author is a professor of Economics and director of the China Center for Economic Studies at Fudan University.

Project Syndicate