The new strategy — or more accurately, the return to an old one — represents a step back from Beijing's repeated commitments to meddle less in the foreign exchange market, but the central bank lacks attractive alternatives.

Letting the yuan slide sharply will only accelerate capital outflows, which would put upward pressure on interest rates just as the central bank wants to make money cheaper in order to stimulate the slowing economy and ease huge debt loads at many Chinese companies.

One alternative is to tighten up the capital account to "trap" money inside the country. That might relieve some of the pressure to manage the exchange rate, but would be a step back from reform.

However, the current strategy is not costless, traders say.

"Liquidity in the onshore market is okay so far, but if the central bank continues to lean against the market forces, transaction volumes could be affected," said Wang Ju, senior Asian FX strategist at HSBC in Hong Kong.

Unlike many other countries with managed exchange rates, the PBOC does not buy or sell yuan to defend its band; it simply throws out any bids outside the limit.

That makes the band invulnerable to speculative attacks, but it can cause the market to flatline if traders refuse to do business in designated range and try to outwait the bank.

That happened in late 2012, when the bank tried — and failed — to hold back a rally it saw as getting out of hand.

TIGHTENING THE CHAIN

The central bank's strategy is clear from the way it sets its official midpoint rate, a fixed exchange rate set every morning from which the exchange rate can rise or fall by 2 percent.

When the midpoint is set in a way that expresses median market consensus — as the name implies — the resulting envelope gives the yuan a 4 percent range across which it can range all day, and few fully liberalized currencies will vary by a wider range in a given day.

But if the midpoint is set far away from average spot prices, the 4 percent envelope becomes meaningless, and that is what is happening now.

Since November the spread between the spot rate and the midpoint has tripled to record highs; the 14-day moving average of the spot yuan is around 6.22 per dollar, while the midpoint is 6.12 per dollar, a record gap.

On Monday, the spot rate came within 10 points of the edge of the trading band, its closest since the band was widened earlier in 2014.

In this case the market — with an eye on the spectacular rise of the dollar index, combined with slides in the euro and the yen — clearly wants the yuan to weaken.

The yuan has been on a slide against the dollar since a peak struck in January 2014. That high was followed by a dramatic crash in the exchange rate — which many said was engineered by the central bank to punish speculators.

While the currency recovered through the summer it began sliding again in late October in the face of policy easing by the PBOC in the face of surprisingly weak economic fundamentals, and a massive dollar rally in global markets. Further easing is expected this year.

Offshore yuan bond yields, particularly at the short end of the yield curve, have started trading at a higher yield to their mainland counterparts for the first time, suggesting investors are demanding higher yields to compensate for downside exchange rate risk.

In the derivative markets, implied volatility in one-month offshore dollar/yuan options has also surged in recent weeks, as has the cost of hedging against a weaker yuan.

While many are calling for the PBOC to widen the band to allow more movement and to accommodate these bets — and there are signs some are moving money on the assumption — the central bank is showing little sign of indulging them so far.

"We don't think China will change course and join the global devaluation game for several reasons," said Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.

"China has already been easing monetary policy and there should not be change in market expectations."