RMB fine-tuning to ease selling pressure

The yuan does not face much near-term pressure to depreciate, at a time when the dollar has not shown much momentum, despite the Fed signaling that an interest rate hike may come soon in its minutes released in May.

The current timing — with the yuan performing relatively well — is ideal for the central bank to increase its influence in managing the exchange rate, according to Chetan Ahya, an Asia-Pacific economist at Morgan Stanley.

He said the preemptive move will help the PBOC ease the pressures ahead.

Major pressure comes from the Federal Reserve’s plan to reduce its balance sheet and a seasonal higher pressure for capital outflows at year-end, according to Wang Youxin, an economist with the research institute of Bank of China.

Wang said more adjustments are expected if the central bank finds it necessary to improve the model to make it more market-oriented.

The adjustment to the pricing model is the fourth change since Beijing decided to adopt a market-based midpoint rate determination mechanism with reference to major currencies on August 2011.

“Attempts made so far only improved the model in terms of the accuracy reflecting market fluctuations,” said Wang. “The yuan’s prospects mainly lie in economic fundamentals, not the pricing scheme of the currency.”