China dilutes US$ role in currency basket

BEIJING • China has cut the weighting of the US dollar in its trade-weighted currency basket and added a further 11 currencies, a change that analysts said should help mitigate some depreciation pressure on the yuan.

Starting from Jan 1, the US dollar will fall to 22.4 per cent from 26.4 per cent in the trade-weighted basket, China Foreign Exchange Trade System said in a statement yesterday. Additions to the CFETS RMB Index basket include the South Korean won, the South African rand, the United Arab Emirates' dirham, Saudi Arabia's riyal, Hungary's forint, Poland's zloty and Turkey's lira.

While the yuan has tumbled almost 7 per cent to an eight-year low against the US dollar this year, it is trading near a four-month high against the CFETS RMB Index. Senior Chinese central bank officials have vowed to maintain stability against the basket as capital outflow pressures mount.

"The move is aimed at reducing the impact of dollar strength on overall performance of the basket," said Ms Christy Tan, head of markets strategy in Hong Kong at National Australia Bank. "It will also make it easier for China to manage yuan stability versus the basket, since the yuan will need to appreciate less versus other non-dollar currencies amid dollar strength."

The weighting of the basket will be evaluated annually and updated at the "appropriate time", according to CFETS. The new composition covers the exchange rates of the nation's main trading partners, it said. The newcomers will take 21.1 per cent of the overall weighting.

"The new basket is more comprehensive and a better reflection of China's trade relations," said Mr Sim Moh Siong, a currency strategist at Bank of Singapore.

The yuan is headed for its steepest annual plunge against the US dollar in more than two decades, and when the year turns, policymakers will be faced with a triple whammy of the renewal of citizens' US$50,000 (S$72,500) quota of foreign-currency purchases, prospects of further US interest rate increases, and concern that US President-elect Donald Trump may slap punitive tariffs on China's exports.

"Adding a batch of emerging-market currencies into the basket will likely increase two-way volatility of the yuan's fixing and the exchange rate," said Mr Ken Cheung, Hong Kong-based Asia currency strategist at Mizuho Bank.

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A version of this article appeared in the print edition of The Straits Times on December 30, 2016, with the headline 'China dilutes US$ role in currency basket'. Print Edition | Subscribe