China plans to change formula to fix yuan

BEIJING • China plans to change the way it calculates the yuan's daily reference rate against the United States dollar, adding a "counter-cyclical adjustment factor" that may blunt the impact of big market swings, according to people familiar with the matter.

Under the new formula communicated to banks by China's monetary authority this week, institutions that provide quotes for the fixing will take into account the previous day's official closing price at 4.30pm local time, changes in baskets of currencies, and the new counter-cyclical adjustment factor, said the people, who asked not to be identified because the matter is private.

Banks are currently tweaking and testing their models and will soon start providing quotes using the new system, the people said.

The change is likely to curb yuan volatility and reduce the role of market forces in determining the exchange rate, analysts said.

China has made yuan stability a priority this year as the authorities try to stem capital outflows and prevent financial shocks before an important leadership reshuffle in the ruling Communist Party at the end of this year.

The stakes have become higher in recent weeks after a regulatory clampdown on the shadow banking system roiled domestic bond and equity markets.

"The counter-cyclical adjustment factor sounds like an increased role for the fixing to be nudged away from where markets would set it," said Westpac Banking senior currency strategist Sean Callow. "The authorities' actions give the impression that they are more worried about yuan stability than declared in their public statements."

Over the past few weeks, the People's Bank of China (PBOC) has consistently set stronger reference rates than analysts predicted. Dealers have responded by pushing down the currency in the spot market, resulting in a wider gap between the fixing and the yuan's official closing price.

The tug of war resulted in a narrow trading range - around 6.9 per US dollar - until the past two days, when the yuan posted its biggest gains since January amid suspected government intervention. The currency strengthened 0.2 per cent to 6.8580 per US dollar as of 12.25pm local time. Against the Singapore dollar, it was trading at 4.9605 yuan.

Central bank policy stipulates that the yuan is restricted to moves of no more than 2 per cent on either side of the reference rate. Officials have never divulged exactly how the daily rate is calculated, with banks having to come up with their own models based on what the fixing has done in the past as well as bits of intelligence from policymakers. The PBOC did not immediately reply to a faxed request for comment.

By taking steps to scale back the spot market's role in the fixing formula, the authorities may undermine efforts to make the currency more freely traded, according to Mr Tim Condon, head of Asia research at ING Groep in Singapore.

"If the yuan endgame is a free float like the other major currencies, refining the PBOC fixing mechanism is a retrograde step."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on May 27, 2017, with the headline 'China plans to change formula to fix yuan'. Print Edition | Subscribe