China central bank sets yuan reference rate near Friday's close

The People's Bank of China set the rate at 6.3969 per US dollar on Monday (Aug 17), within 0.1 per cent of Friday's slightly stronger level of 6.3975, and the yuan's close in Shanghai.
The People's Bank of China set the rate at 6.3969 per US dollar on Monday (Aug 17), within 0.1 per cent of Friday's slightly stronger level of 6.3975, and the yuan's close in Shanghai. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - The yuan's reference rate was little changed for the second day, helping stabilize the exchange rate after a devaluation last week triggered the currency's biggest loss in two decades.

The People's Bank of China set the rate at 6.3969 per US dollar on Monday (Aug 17), within 0.1 per cent of Friday's slightly stronger level of 6.3975, and the yuan's close in Shanghai.

The fixing was cut a record 4.4 per cent last week as the central bank adopted a more market-driven approach to setting the level. The yuan fell 0.03 per cent to 6.4510 as of 9:20 am in Hong Kong's offshore market, while trading in Shanghai will begin at 9:30 am

Under a new methodology used to determine the reference rate, market makers who submit contributing prices have to consider the previous day's close, foreign-exchange demand and supply, as well as changes in major currency rates, the PBOC said on Tuesday. Policy makers didn't elaborate on the central bank's role in setting the fixing, which the yuan can diverge from by a maximum 2 percent in Shanghai.

The yuan will probably move in both directions in the future following last week's devaluation as the economy stabilizes, according to Ma Jun, chief economist at China's central bank. A more market-oriented pricing mechanism for the yuan will help to avoid excessive deviation from the equilibrium level and significantly reduce the possibility of sudden fluctuations, he said Sunday in an e-mailed statement.

Policy makers are trying to balance the need for financial stability with a desire for stronger exports and the yuan's inclusion in the International Monetary Fund's basket of reserve currencies. China's move to link the yuan's value to market forces is an encouraging step and the currency ought to move to a free float within two to three years, Markus Rodlauer, the IMF's mission chief to China, said Friday.

The current exchange rate is now more consistent with economic fundamentals, and there is no need to adjust it to boost exports, PBOC Deputy Governor Yi Gang said at a press conference on Aug. 13. The central bank has exited regular intervention, and will act when the market's volatility is excessive, Yi said.