The People’s Bank of China has made a change to the regime used to manage the yuan, effectively removing a component used by banks to calculate their submissions to the currency’s daily reference rate, people familiar with the matter said.
The central bank told some lenders that contribute to the reference rate to adjust their use of the “countercyclical factor” in such a way that it would have no impact on the mechanism known as the fixing, said the people, who asked not to be identified, as the details are private.
They said the change has already taken effect.
The yuan, which headed for its biggest drop in two months on the news, is allowed to move a maximum of 2 percent either side of the fixing.
Analysts said the change shows China is confident in the yuan’s trajectory, which has been one of appreciation.
China last year introduced the countercyclical factor in a bid to reduce volatility in the yuan, which had weakened for three straight years, triggering the introduction of capital controls.
Market watchers said it gave the central bank more control over the currency, but undermined earlier efforts to make the yuan more accessible and market-driven.
Greater control over the fixing — along with a steady economy and a retreat in the US dollar — helped ignite a rally in the yuan in the second half of last year.
“This is not surprising, as the expectation for depreciation has waned,” Australia & New Zealand Banking Group Ltd chief greater China economist Raymond Yeung (楊宇霆) said. “This suggests that the authorities expect to see the exchange rate to float within a reasonable range in the near term.”
In an e-mail to Bloomberg News, the central bank said that it is up to the banks that contribute to the fixing to handle their own calculations.
Lenders look to fundamentals when determining adjustments to the components that make up the factor, it added.
The countercyclical factor has typically been seen as a tool to address yuan depreciation without draining foreign currency reserves.
Goldman Sachs Group Inc estimated that on most days since October last year, the fixing ended up stronger after the factor was incorporated.
The yuan’s strength over the past year paved the way for the policy shift. With the dollar in a protracted decline, outflows from China have slowed, resulting in the yuan’s turnaround.
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