PBOC Strengthens Yuan Fixing to a Level That Forces Appreciation

China’s central bank moved its reference rate for the yuan outside the daily trading band for the first time in 21 months, forcing the currency to strengthen as authorities seek to limit volatility in capital flows.

The People’s Bank of China raised its fixing by 0.08 percent to 6.1318 a dollar, which was 2.06 percent stronger than Tuesday’s closing spot price. The onshore exchange rate can deviate from the reference by a maximum 2 percent. China’s capital account posted a $91.2 billion deficit in the fourth quarter, the widest in data going back to 1998. The PBOC may step in to keep the exchange rate stable if the impact from capital flows becomes larger, according to a commentary in the official China Securities Journal Wednesday.

The currency rose 0.17 percent to close at 6.2477 a dollar in Shanghai, China Foreign Exchange Trade System prices show. That’s 1.86 percent weaker than the PBOC’s rate. The currency sank to an eight-month low of 6.2606 on Monday.

“It’s obvious that the PBOC is guiding a stronger yuan through the fixing,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “China doesn’t want the yuan to depreciate too sharp and too fast as that could derail their efforts on yuan internationalization.”

China is promoting greater use of the yuan in global trade and investment and depreciation erodes the attraction of the currency, which a report last week showed overtook Canada’s dollar in December to rank fifth in terms of global payments. While the yuan has weakened against the dollar in the past six months, it has advanced against the remainder of 17 major currencies, according to data compiled by Bloomberg.

Dollar Retreat

It’s the first time since May 2013 that the central bank has set a fixing that required a move in the spot rate to keep the yuan’s trading band intact. The fixing is announced at about 9:15 a.m. daily in Shanghai, while the currency starts trading at 9:30 a.m.

The Bloomberg Dollar Spot Index fell by the most since October on Tuesday as the euro advanced after Greece’s government was said to retreat from demanding a writedown of its debt, boosting optimism that Europe won’t face a renewed crisis.

In Hong Kong’s offshore trading, the yuan advanced 0.3 percent, the biggest gain since May 2014, to 6.2522 a dollar, according to data compiled by Bloomberg. It has strengthened 0.5 percent this week. Twelve-month non-deliverable forwards rose 0.08 percent to 6.3820, 2.1 percent weaker than the Shanghai spot rate.

Potential Measures

The PBOC is said to be preparing potential measures to help address the risk of volatility in capital flows into and out of the nation in coming months. Two options under consideration are widening the yuan’s trading band and guiding the exchange rate lower by adjusting the fixing against the greenback, according to two people familiar with the matter, who asked not to be named as the discussions were private.

The yuan’s trading band was broadened from 1 percent in March 2014 and increased from 0.5 percent in April 2012. Prior to the band widening last year, the currency touched both ends of its then-permitted trading range. China kept the yuan basically unchanged against the dollar from mid-2008 for two years during the global financial crisis.

Yuan depreciation has a “much more” positive effect than negative on China’s economy because growth is slow, Yu Yongding, a former PBOC adviser, said in an interview on Tuesday in New York.

A services Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics for January was 51.8, the lowest in six months, data showed Wednesday. Similar gauges of manufacturing released in the past week came in below 50, indicating declines in output.

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