China’s central bank plans change to yuan fixing formula, sources say

A ‘counter-cyclical adjustment factor’ will apparently be added to reduce the impact of market volatility

PUBLISHED : Friday, 26 May, 2017, 12:49pm
UPDATED : Friday, 26 May, 2017, 12:48pm

China plans to change the way it calculates the yuan’s daily reference rate against the dollar, adding a “counter-cyclical adjustment factor” that may blunt the impact of big market swings, according to people familiar with the matter.

Under the new formula communicated to banks by China’s monetary authority this week, institutions that provide quotes for the fixing will take into account the previous day’s official closing price at 4.30pm local time, the changes in baskets of currencies, and the new counter-cyclical adjustment factor, said the people, who asked not to be identified because the matter is private.

Yuan jumps to 3-month high as central bank intervenes to squeeze currency bears

Banks are currently tweaking and testing their models and will start to provide quotes using the new formula soon, the people said.

Under current conditions, the new formula would partly filter out the impact of excessive volatility in the spot market by reducing the closing price’s role in the next day’s fixing, the people said.

In recent weeks, the central bank has consistently set stronger reference rates than analysts predicted. Traders have responded by pushing down the currency in the spot market.

Beijing says yuan policy is actually doing US a favour

Central bank policy stipulates that the yuan is restricted to moves of no more than 2 per cent either side of the reference rate. Officials have never divulged exactly how the daily rate is calculated, with banks having to come up with their own models based on what the fixing has done in the past and bits of intelligence from policymakers.

The People’s Bank of China didn’t immediately reply to a request for comment.