China discards black box exchange rate factor as foreign investors pour money in
- Chinese banks have phased out the countercyclical factor used to determine the midpoint of the yuan’s daily trading range against the US dollar
- The move reflects confidence the currency will appreciate further as foreign investment is ploughed into Chinese equities and bonds, analysts say
China has taken another step to let the yuan’s exchange rate against the US dollar be more determined by market forces, reflecting policymakers’ confidence it will continue to appreciate as foreign investors pour money into mainland financial markets and the economy continues its strong recovery from the effects of the coronavirus pandemic, analysts said.
The People’s Bank of China (PBOC), the country’s central bank, asked banks on Tuesday to remove the countercyclical factor (CCF) from the formula they use to calculate estimates for the daily central parity for the yuan, which they submit to the PBOC for final determination every morning.
The daily parity rate forms the midpoint of the yuan’s daily trading range against the US dollar, with the Chinese currency allowed to rise or fall by 2 per cent on either side.
The PBOC’s decision to stop using the countercyclical factor in the daily parity rate – a formula for maintaining control over the yuan’s exchange rate, the exact content of which has never been disclosed – comes after the yuan’s performance in the third quarter was the best in 12 years.
Foreign investment has been pouring into Chinese equities and bonds because higher interest rates are making yuan-denominated assets more attractive globally.