China’s decision to break its currency peg with the US dollar – a peg reinstated in July 2008 as the global financial system began to unravel – has won Beijing predictable plaudits for its PR savvy.

China’s announcement defused the issue ahead of next weekend’s G-20 summit in Toronto. For all the fury coming out of a Congress underwhelmed about the move – Beijing did not shift its currency at all; it just simply agreed to make it more flexible – it is difficult to see the renminbi now becoming central to the US mid-term elections in November. The Obama administration has many bigger fish to fry with Beijing than to haggle endlessly over the Chinese currency.

One of the big risks for the Chinese authorities in beginning to gently appreciate the currency is that they set up a one-way bet for investors who believe that the renminbi can only get stronger from now on. Large inflows of hot money could make it difficult to conduct monetary policy, officials fear, and might potentially aggravate inflation.

That explains why there has been much more talk since Saturday about volatility in renminbi trading and using a currency basket as a reference. When China abandoned its currency peg in 2005, it said the renminbi would trade against a currency basket of its main trading partners, but in reality it trailed the US dollar and was much less volatile than the 0.5 per cent daily trading bands allowed.

China’s yuan soared on Monday to close at its highest level against the dollar since its July 2005 revaluation, as the central bank stepped aside and tolerated broad gains on the first trading day after it ditched the currency’s two-year peg to the dollar.

The central bank appeared to be allowing the market to find its feet by not intervening and letting the yuan post its biggest daily gain against the dollar since its revaluation in July 2005, staying true to its pledge on the weekend that it would allow greater currency flexibility.

The yuan closed at 6.7976 against the dollar on Monday, up 0.42 percent from Friday’s close of 6.8262. It hit a high of 6.7958 in intraday trade, an all-time high since the revaluation and rising as much as 0.47 percent from the central bank’s mid-point, nearing its limit of 0.5 percent.