Ad­just­ment likely to blunt impact of big mar­ket swings on ex­change rates

New Straits Times - - Business World -

BEI­JING an­a­lysts.

China has made yuan sta­bil­ity a pri­or­ity this year as au­thor­i­ties try to stem cap­i­tal out­flows and pre­vent fi­nan­cial shocks be­fore an im­por­tant lead­er­ship reshuf­fle in the rul­ing Com­mu­nist Party at the end of this year.

The stakes have got­ten higher in re­cent weeks af­ter a reg­u­la­tory clam­p­down on the shadow bank­ing sys­tem roiled do­mes­tic bond and eq­uity mar­kets.

“The counter-cycli­cal 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.

Over the past few weeks, the cen­tral bank has con­sis­tently set stronger ref­er­ence rates than an­a­lysts pre­dicted. Deal­ers have re­sponded by push­ing down the cur­rency in the spot mar­ket, re­sult­ing in a wider gap be­tween the fixing and the yuan’s of­fi­cial clos­ing price.

The tug-of-war re­sulted in a nar­row trad­ing range around 6.9 per dol­lar un­til the past two days, when the yuan posted its big­gest gains since Jan­uary amid sus­pected govern­ment in­ter­ven­tion.

Cen­tral bank pol­icy stip­u­lates that the yuan is re­stricted to moves of no more than two per cent on ei­ther side of the ref­er­ence rate.

Of­fi­cials have never di­vulged ex­actly how the daily rate is cal­cu­lated, with banks hav­ing to come up with their own mod­els based on what the fixing has done in the past and bits of in­tel­li­gence from pol­i­cy­mak­ers.

By tak­ing steps to scale back the spot mar­ket’s role in the fixing for­mula, au­thor­i­ties might un­der­mine ef­forts to make the cur­rency more freely traded, ac­cord­ing to Tim Con­don, head of Asia re­search at ING Groep NV in Sin­ga­pore. Bloomberg


China has made yuan sta­bil­ity a pri­or­ity this year to stem cap­i­tal out­flows and pre­vent fi­nan­cial shocks.

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