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--PBOC Email: Neither Denies Nor Confirms Report
--PBOC May Retain Factor To Deter Short-Sellers
BEIJING (MNI) - The People's Bank of China has allowed banks participating
in the yuan-fixing determination process to independently judge how to apply the
so-called counter-cyclical factor, the central bank said in an email to Market
In the email, the PBOC said that banks involved in the yuan-dollar exchange
rate-setting process may decide whether to adjust the "counter-cyclical
coefficient based on the adjustment procedures of their internal quotation
models" based on changes in the economy and the extent of the Forex market's
While that may sound cryptic, the central bank is essentially saying the
major banks involved can act independently on this vital instrument deployed by
the PBOC to manage the value of the yuan.
MNI contacted the PBOC following media reports that the central bank had
for some time stopped using this counter-cyclical component in setting the
yuan's value against the U.S. dollar. That has set the market abuzz, with some
taking it as a sign the PBOC is intending to guide currency moves again.
Some may recall early 2015, when China stunned the world markets by letting
its currency sharply depreciate. But that clearly isn't the case now, which
rather indicates the PBOC is comfortable easing controls over the currency.
Without giving details and context, the central bank's email to MNI
suggests it neither refutes nor confirms the media reports.
Some traders who spoke to MNI acknowledged that the component hasn't been
applied for some time. A Shanghai-based forex trader said that since the end of
last year, his model has made better predictions if discounting the
counter-cyclical factor. Another forex trader from a major bank made a similar
The PBOC may be signalling that the suspension of the so-called
counter-cyclical factor in managing its yuan exchange may be temporary,
therefore it shouldn't be seen as a permanent abandonment of this potent
instrument, the traders suggested.
"The counter-cyclical factor is like a nuclear deterrent: PBOC hasn't used
it for a while nor does it need to now," a Shanghai-based trader told MNI. "But
as long as the central bank keeps the market guessing, it's serving the purpose
of preventing one-way bets against the currency," he said.
"The counter-cyclical factor was to stop the one-way bet for the yuan to
depreciate, but that expectation has now faded," the Shanghai-based trader said.
In that regard it is similar to the PBOC move last September, cutting reserves
on forex forward purchasing -- both were intended to normalize forex policies,
the trader said.
It may be tempting to assume the PBOC may have acted to weaken the yuan to
help China's exports and the overall economy. However, the yuan's impact on
exports is better gauged by how it trades against a basket of currencies. The
latest CFETS yuan index was 94.9 on last Friday, while highest since Nov. 10,
2017, it is not unusually high enough to choke exports.
"It is possible that the PBOC doesn't want the yuan to appreciate too
quickly, but I don't think that's the main intent here," said the Shanghai-based
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