Photographer: Qilai Shen/Bloomberg

Fixing Tweak Shows China Confident in Steady Yuan, Analysts Say

  • China’s currency may trade more flexibly in the near term
  • PBOC seen having option to restart "counter-cyclical factor"

China’s central bank has enough confidence in the yuan, at least for now, to give markets more of a say in setting the daily fixing, according to analysts.

The People’s Bank of China has told some lenders to adjust their use of a “counter-cyclical factor” in submissions for the currency’s daily reference rate so that it has no impact on the result, said people familiar with the matter. China introduced the component last year in a bid to reduce volatility. The PBOC said in an emailed response to Bloomberg News that it’s up to the banks that contribute to the fixing to handle their own calculations.

Read more about the fixing change here.

The yuan may trade more flexibly in the near term because of the change, though authorities won’t hesitate to reintroduce the factor if market volatility increases, economists and strategists say. China’s currency strengthened 6.8 percent against the dollar in 2017 after three years of depreciation.

Oversea-Chinese Banking Corp. (Tommy Xie, economist)

  • "The central bank is more confident about the yuan, which has stayed steady recently"
  • The counter-cyclical factor has not been playing a big role in the yuan’s daily fixing since September
  • "Still, the central bank will re-activate the factor if the currency gets too volatile again"

Scotiabank (Gao Qi, foreign-exchange strategist)

  • The latest move is aimed at increasing two-way flexibility and comes in part because pressure for the currency to depreciate has faded
  • This is a step toward a clean float, and "we could see a more market-determined yuan exchange rate"
  • "Market expectations for the yuan exchange rate are more neutral now"

Australia & New Zealand Banking Group Ltd. (Raymond Yeung, chief greater China economist)

  • "This suggests that the authorities expect to see the exchange rate float within a reasonable range in the near term"
  • "As the market generally holds a positive economic outlook for 2018, the exchange rate will largely be driven by global rather than domestic factors"

Westpac Banking Corp. (Frances Cheung, head of Asia macro strategy)

  • "This is one direction to go -- and an easy way out -- if the authorities would like to proceed with FX reform"
  • Recent yuan fixing patterns suggests that the factor was not being used; the central bank has the flexibility to put the tool back in place if needed

— With assistance by Helen Sun, Justina Lee, Tian Chen, and Xiaoqing Pi

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