China dilutes dollar role in currency basket
beijing — China took another step to degrade the dollar in defining the value of its currency, in an effort that cuts against its rival’s stubbornly strong hold on the global financial system.
An arm of the People’s Bank of China (PBOC), which last year started setting the yuan against a basket of currencies, on Thursday said it’s adding 11 units to that reference group. The move lowers the dollar’s weighting by four percentage points, to 22.4 per cent.
While the logic of determining the yuan’s value against the currencies of its trading partners is clear, the problem is that the dollar is still the dominant reference in the perception of the public and the market. The US currency is on one side of 88 per cent of all foreign exchange trading.
“The dollar-yuan rate will still be the benchmark that determines sentiment,” said Hao Hong, chief strategist in Hong Kong at Bank of Communications International Holdings. “The basket is just a reference, so the change in the index’s composition and the efforts of keeping it stable will do little to boost confidence.”
The yuan’s retreat against the CFETS RMB Index, the basket set by the China Foreign Exchange Trade System, has been more moderate this year than against the dollar, as the currencies of China’s trading partners have also declined.
The challenge is that China’s swelling middle class, along with its ultra-wealthy, are looking to diversify some of their increasing pool of savings overseas. Prospects for higher US interest rates only increase the allure of the dollar.
Adding currencies such as the won, South Africa’s rand, the UAE dirham, Saudi Arabia’s riyal, Hungary’s forint, Poland’s zloty and Turkey’s lira won’t be sufficient to change the public’s view, according to analysts from institutions including Royal Bank of Scotland, Bank of Communications and ICBC International Research. — Bloomberg