As China's yuan swings back into the global spotlight, it mightseem like an odd time for authorities in Beijing to loosen theirgrip on the tightly managed currency.

Yet for a growing number of analysts and investors, the prospectof a freely floating yuan — a Chinese exchangerate wholly determined by market forces — is nolonger a distant possibility. Advocates include a government-backedresearcher and a former central bank adviser, while bond-marketpowerhouse Pacific Investment Management Co. says the chances of afree float are rising.

The risks of unshackling China's currency are hard to ignore. Itwould almost certainly lead to a knee-jerk tumble, exacerbatingcapital outflows and sending shockwaves through global markets.Investors around the world took notice of the yuan's elevatedvolatility last week, even as it paled in comparison to everydayswings in many developing-nation peers.

Free-float proponents say the long-term benefits for Chinaoutweigh the costs. A quick transition to a market-determinedexchange rate would allow the country to preserve itsforeign-currency reserves, re-assert control over domestic monetarypolicy and combat criticism from U.S. President-elect Donald Trumpthat Communist Party apparatchiks are manipulating thecurrency.

“At the end of the day, what you have to accept is the value ofthe currency as it is right now isn't appropriate,” said LukeSpajic, the head of emerging Asia portfolio management at Pimco,which oversees about $1.55 trillion and is calling for a mid-to high-single-digit yuan depreciation over the next year. “Thingsneed to change.”

The People's Bank of China didn't reply to a faxed request forcomment.

Under the country's current rules, the yuan can move a maximum2% from the central bank's daily fixing, though the spot rate hasseldom come close to the band's edges since an August 2015 changedesigned to create a more market-based system. China is widelyassumed to influence the exchange rate through governmentintervention; an $833 billion slide in currency reserves over thepast two years suggests authorities are propping up the yuan viadollar sales.

Just last week, a short squeeze in the offshore market for yuanin Hong Kong was attributed by some analysts to governmentmeddling. After touching a record low in the city on Jan. 2, theChinese currency rallied about 1.9% to 6.8598 per dollar through6:12 p.m. Hong Kong time on Thursday.

The nation's existing approach allows policy makers to managethe pace of yuan depreciation, preventing abrupt market swings thatcould destabilize the financial system. With authorities focused oneconomic stability ahead of a key leadership reshuffle this year,it's easy to see why they'd prefer an exchange-rate system thatgives them a degree of control.

Intervention has its costs, though. While last week's surge ininterbank lending rates shook out bearish speculators in Hong Kong,it also set back China's efforts to make the yuan an internationalcurrency. The central bank's focus on managing the exchange rateand stemming capital outflows also reduces its leeway to adjustdomestic borrowing costs to suit the domestic economy, a trade-offknown as the “impossible trinity.”

“If you don't release the depreciation pressure, China'smonetary policy will be in a tough position,” said Zhu Baoliang,Beijing-based chief economist at the State InformationCenter, which is backed by China's government planning body,the National Development and Reform Commission. “Allowing yuandepreciation can reduce domestic risks and interrupt thetransmission of global risks.”

For all the imperfections of China's current system, MizuhoSecurities Asia Ltd. economist Shen Jianguang says now is not thetime to liberalize the exchange rate. With the U.S. Federal Reserveprojected to raise borrowing costs further this year, afree-floating yuan would tumble against the dollar and fuel“massive” capital outflows, Shen said. Rather than applaud China'sadoption of a market-based rate, the Trump administration couldderide the move as harmful to U.S. interests, Shen said.

“If they're going to liberalize the exchange rate, there's onlyone way to go: the renminbi would depreciate,” he said, usinganother name for the Chinese currency. “The market would panic aswe witnessed in 2015.”

Consensus analyst forecasts and positioning in derivativesmarkets suggest most China watchers don't foresee a major shift incurrency policy anytime soon. The median estimate in a Bloombergsurvey calls for the yuan to drop 3.5 percent versus the dollar byyear-end, while options are pricing in just a 30 percent chance thecurrency will weaken 10 percent over the same period.

China is still better off letting the yuan fall to its naturallevel than burning reserves to slow its retreat, said Yu Yongding,former academic member of the PBOC's monetary policy committee. Heand Zhu both argue that China doesn't have to worry about a sharpfall in the currency because the nation's reserves and tradesurplus are still large and inflation is low.

“Intervention can limit volatility, but it can't change thetrend,” Yu said. “Ultimately, you'll have to give up anyway.”

It's a view shared by BNP Paribas Investment Partners andLondon-based think tank Chatham House. Paola Subacchi,Chatham's research director of international economics, says evenif Chinese policy makers don't pursue a free float, they couldwiden the yuan's trading band to signal a greater role for marketforces.

“It would be perfectly legitimate for Chinese policy makers toturn around and say: 'If you complain that we are manipulating theexchange rate, then we'll widen the band and let the marketdecide,”' said Colin Harte, a fund manager in London at BNP ParibasInvestment Partners, which oversees about 560 billion euros ($591billion).

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