China’s central bank eases exchange rate setting mechanism

China’s central bank has eased controls over the yuan exchange rate, reflecting the second step in the past year aimed at taking the wind out of the currency as capital outflows from the country ease.

The People’s Bank of China has removed the influence of the “counter-cyclical factor” from the formula used to calculate the daily central parity of the yuan’s exchange rate against the US dollar, according to sources familiar with the matter.

The PBOC’s yuan reference rate against the US dollar is used as a mid-point, allowing trades of up to 2 per cent on either side of the so-called fix for the day.

In response to an inquiry about the adjustment to the currency’s daily reference rate setting, the PBOC said that components to calculate the “counter-cyclical factor” were based on quotations submitted by market makers.

“Adjustments of internal quotations due to changes of the fundamentals of the macro economy and the cyclicality of the foreign exchange market, are made according to internal price models and determine whether the counter-cyclical factor needs to be revised,” the PBOC said.

In May, the PBOC introduced the “counter-cyclical factor”, which was designed to lessen the affect of market forces on the price setting of the reference rate amid strong depreciation pressure in the currency and capital outflows.