China tweaks yuan basket to play down US dollar

China is reducing the share of US dollars in its currency basket for measuring the yuan value, a technical adjustment to redirect market attention from the yuan-dollar parity.

Although other central banks, including the US Federal Reserve and European Central Bank, also release similar nominal effective exchange rate indices for their currencies, calculated against a basket of trade partner currencies, the People’s Bank of China has been particularly active in promoting the yuan’s rate against a group of currencies, rather than the dollar alone.

As part of Beijing’s efforts to stabilise expectations of the yuan’s value, China’s monetary authority has repeatedly said it’s not fair to look at the yuan solely against the US dollar, which has been strengthening, particularly after Donald Trump won the presidential election. The yuan lost about 7 per cent against the dollar in 2016, becoming the worst-performing major Asian currency that year, and recording its largest annual loss against the dollar since 1994.

The China Foreign Exchange Trade System, the onshore foreign exchange market under the central bank, said on Thursday night that it would expand the currency basket to 24 foreign currencies from the start of 2017, from the current 13 currencies. The new members include the Korean won, Swedish krona, Saudi riyal, Hungarian forint and Poland zloty.

As a result, the weighting of the US dollar in the basket will fall to 22.4 per cent from the previous 26.4 per cent.