MNI EXCLUSIVE: PBOC Acts On Yuan As Strengthening Bets Grew

A move by the People's Bank of China to ask some banks to suspend use of the counter-cyclical factor in contributions to yuan fixing came amid signs of increasing bets on appreciation but the PBOC remains determined to increase the market's role in determining the exchange rate, a former senior forex official told MNI, with a policy advisor adding that the factor could be reintroduced in the future.

The PBOC is increasingly ready to tolerate a wider range of trading in both directions, said Guan Tao, former director of the international payments department at State Administration of Foreign Exchange. Investors should be alert to the possibility that geopolitical events or a worsening of the global Covid pandemic prompt market volatility and depreciation pressure on the yuan, he added.

The PBOC's move on Tuesday came after offshore yuan strength in one-year non-deliverable forwards from Oct. 14-21 and a market closing price stronger than the fixing for most days from Oct 9 to 23, the longest such period since February 2018, Guan noted, speaking after the China Foreign Exchange Trade System announced late on Tuesday that some lenders had stopped using the counter-cyclical factor for reference rates submitted to the PBOC.

The counter-cyclical factor, whose calculation is linked a basket of currencies, was tending to make the yuan track the euro higher against the dollar, an anonymous advisor told MNI. The fact that the CFETS's statement said that banks had "voluntarily and gradually" suspended their use of the factor indicated that the authorities would retain the factor in their toolkit in case it is needed in future, the policy advisor said.

FORWARD FX REQUIREMENTS

Zhang Ming, a senior fellow at the Institute of World Economic and Politics under the Chinese Academy of Social Sciences, said suspension of the factor was aimed at slowing any sharp yuan appreciation, and was similar in intent to the PBOC's recent decision to lift the reserve requirement on forward FX transactions.

While the removal of forward reserve requirements initially knocked the yuan, sending USDCNY 524 pips higher on Oct. 12, the currency resumed its appreciation the following day and touched 6.6293 by Oct 21.

If the PBOC had meant to weaken the yuan, it would have reversed the factor rather than removing it, noted Li Liuyang, chief forex analyst at China Merchants Bank, who expected the impact of the move to be limited. The authority's neutral stance on exchange rate management should help further the authorities' ambitions of promoting the international use of the yuan, he said.

The yuan is likely to continue to remain relatively strong for now, said Wang Youxin, analyst at Bank of China, but he added that it is likely to trade within a wide range and the dollar could rebound in the event of an intensification of the Covid pandemic or in a bout of financial market turbulence.

USDCNY closed at 6.7138 at 16:30pm Beijing time, from 6.7157 on Tuesday. The CNY fixing was set at 6.7195, falling 206 pips from 6.6989.