CHINA MULLS NEW METHOD FOR YUAN MIDPOINT FIXING
Adjustment likely to blunt impact of big market swings on exchange rates
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.