Oct 28, 2020 04:17 AM

China Banks Adjust Models for Yuan Fixing After Rapid Rally

(Bloomberg) — Some Chinese banks have stopped including a key factor in the formulas that go to the country’s central bank to calculate the yuan’s daily reference rate, which may weigh on the currency.

The banks stopped using the counter-cyclical factor recently, according to a statement (link in Chinese) on the website of the China Foreign Exchange Trade System. The factor is part of how the banks calculate a quote for the reference rate, known as the fixing, which they submit to the People’s Bank of China for a final rate every morning. The fixing restricts the onshore yuan’s moves by 2% in either direction.

Such a change would in effect allow Beijing to give up some influence over the exchange rate. Under the tweak, lenders would have more room to submit quotes for a weaker fixing and guide the currency lower in the spot market.


The PBOC sets the fixing, which limits the onshore yuan’s moves to 2% in either direction, at 9:15 a.m. every trading session based on submissions from the 14 banks. Apart from the counter-cyclical factor, their formulas for the rate typically take into account the currency’s official closing price the day before and moves in other major exchange rates.

Reuters reported earlier that the PBOC asked some of the 14 banks that help set the fixing to adjust their models, citing people familiar with the matter. The offshore yuan fell as much as 0.3% to 6.7234 per dollar after the report and last traded little changed at 6.6990.

The counter-cyclical factor was introduced in May 2017 to rein in depreciation and capital outflows before a leadership reshuffle of the ruling Communist Party. It was suspended in January 2018 as the yuan rebounded and reinstalled seven months later amid souring China-U.S. relations.

The fixing is an important tool Beijing uses to guide market expectations for the yuan. Officials can also exert influence over the exchange rate by issuing verbal warnings to traders and adjusting the supply of liquidity — measures they haven’t resorted to during this period of yuan appreciation.

The reported move comes after the central bank this month made it cheaper to short the currency with forwards. The rule change initially triggered declines in the yuan, which have since been erased.

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