Bank may introduce ‘counter-cyclical factor’ in setting the yuan-dollar rate

The central bank’s preemptive move to fine-tune the renminbi’s pricing model will help ease the selling pressure facing the currency in the second half of the year, after helping push up the yuan on Thursday, analysts said.

The People’s Bank of China revealed last week it was considering introducing a “counter-cyclical factor” in setting the reference rate of the yuan against the dollar. While details of the adjustment have not been disclosed, the yuan’s daily fixing was set at 6.8090 on Thursday, its strongest level since November.

The overnight yuan interbank rate in Hong Kong, or HIBOR, an indicator reflecting the cost for short selling of the yuan, spiked to the highest level in six months on Thursday.

The high costs of short selling of the yuan helped boost the offshore yuan against the dollar up to 6.7240 in midday trading on Thursday.

The strong performance of the yuan means that the signal sent by the central bank has already started to take effect, and that can be sustained for a rather long period of time, according to Nomura’s Hong Kong-based chief China economist Zhao Yang, referring to

The yuan’s prospects mainly lie in economic fundamentals, not the pricing scheme of the currency.” Wang Youxin, economist at Bank of China’s research institute

the central bank’s move to add the counter-cyclical factor to the pricing model.

The adjustment aims to help ease the potential for “herd behavior” in the foreign exchange market, according to an online statement by the central bank last Friday.

Fielding Chen, a Bloomberg economist, said key macro variables such as GDP, inflation and PMI may be included, to reflect the situation of the economy.

That said, the message sent to the market itself matters more than the composition of the factor, according to Zhao.

“It sounds to me that the PBOC prefers having more influence over the yuan’s exchange rate at this stage,” he said.