China Tweaks Yuan’s Fix to Keep Currency Stable – 27 May 2017

  • A new tweak to the mechanism of setting the yuan’s exchange rate gives China’s central bank more power to counter market sentiments betting against the currency, analysts said.
  • The adjustment, announced 26 May 17 by the currency trading arm of the People’s Bank of China (PBOC), adds a “countercyclical” component to the system of calculating the daily fixing of the yuan’s exchange rate.
  • The change would help smooth out the impact of investor sentiment that tends to amplify market ups and downs, thus alleviating the so-called “herd effect” that may exist in the foreign currency market, the China Foreign Exchange Trade System said in the announcement.
  • The PBOC has already taken steps to shore up the yuan amid expectations that it may continue to depreciate as China’s economic growth slows. It has tightened restrictions on capital outflows and strengthened interventions in both onshore and offshore markets to prop up the yuan’s value when investors were saying it should be lower.
  • The new adjustment would give it more room for manoeuvres in trying to keep the yuan’s exchange rate from big fluctuations, said Xiao Lishen, senior research fellow at the Chinese Academy of Social Sciences. The flip side, however, is that it went against the government’s previous goal of making the exchange rate mechanism more flexible and more market-oriented.

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