China is considering changes to the way it calculates the yuan’s daily reference rate against the US dollar, a move that is likely to reduce exchange-rate volatility while undermining efforts to increase the role of market forces in Asia’s largest economy.
Policymakers might add a “countercyclical factor” to the yuan’s daily fixing, a government statement issued yesterday said, which confirmed an earlier report by Bloomberg News.
Analysts said the change would give authorities more control over the fixing and curb the influence of market pricing.
While a more tightly managed currency could give China breathing room to push forward with a deleveraging campaign that is popular among Western investors, it would mark a step back from Chinese President Xi Jinping’s (習近平) 2013 pledge to give markets a central role.
The central bank’s existing fixing system won international plaudits for being more market-oriented and helped the yuan win inclusion into the IMF’s basket of global reserve currencies.
“The countercyclical adjustment factor sounds like an increased role for the fixing to be nudged away from where markets would set it,” said Sean Callow, a senior currency strategist at Westpac Banking Corp in Sydney. “The authorities’ actions give the impression that they are more worried about yuan stability than declared in their public statements.”
Under the new formula communicated to lenders by the People’s Bank of China (PBOC) this week, institutions that provide quotes for the fixing would add the countercyclical factor to their existing models, which takes into account the previous day’s official closing price at 4:30pm local time and changes in baskets of currencies, people familiar with the matter said.
Banks are tweaking and testing their models, and are to start providing quotes using the new system soon, the people said.
China’s foreign-exchange market can be driven by irrational expectations, resulting in “unreal” supply and demand that increases the risk of overshooting, according to a statement on Chinamoney.com (神州財富), which is run by the China Foreign Exchange Trade System.
The “countercyclical factor” might ease “herd actions” and help guide investors to pay more attention to economic fundamentals, the statement said.
Central bank policy stipulates that the yuan is restricted to moves of no more than 2 percent on either side of the reference rate.
For Beijing, the existing market-based fixing system’s downside is that it makes the exchange rate more difficult to control.
The yuan’s 6.5 percent slide last year created a vicious circle of capital outflows and currency weakness, prompting officials to burn through more than US$300 billion of foreign-exchange reserves and introduce tighter capital controls.
Authorities might see a new fixing formula as a cheaper way to achieve yuan stability.
Officials have already used the reference rate to guide the currency higher in recent weeks, setting the fixing at levels that were consistently stronger than analysts predicted.
“The PBOC has been fixing with a major dose of discretion,” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. “We can consider this ‘countercyclical adjustment factor’ as using that discretion.”
While the yuan has fluctuated in a narrow band at about 6.9 yuan per US$1 for most of this year, the currency broke out of that trading range over the past two days amid suspected government intervention.
The currency strengthened 0.2 percent to 6.8586 yuan per US$1 as of 3:36pm local time yesterday, heading for the biggest two-day gain since January.
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