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Free AccessREPEAT: MNI: PBOC May Step In If Yuan View 1-Way: Researcher
Repeats Story Initially Transmitted at 07:10 GMT May 31/03:10 EST May 31
--Yuan May Trade in Wider Volatility Band This Year: CASS Official
--Currency Basket Should Play Lesser Role in Pricing Formula
BEIJING (MNI) - China's central bank may intervene in the forex market to
discourage one-way bets against the yuan, Xiao Lisheng, senior research official
at the Chinese Academy of Social Sciences (CASS), a leading government think
tank, told MNI in an interview.
The People's Bank of China (PBOC) is likely to reactivate the so-called
counter-cyclical adjustment factor in its daily fixing formula if market
sentiment on the yuan swings in one direction, said Xiao, who is the deputy
director of International Finance Research Institute of World Economics and
Politics at CASS.
"When investors bet on one-way movement of the yuan vs. the dollar, it
would disrupt the orderly functioning of the pricing mechanism of the market,
and the role of the counter-cyclical adjustment is to correct that disorder,"
Xiao said.
The counter-cyclical factor largely works to guide market sentiment in a
direction satisfying the PBOC, but the usage should be more transparent and let
the market know the central bank's redline, he said.
Xiao, an expert on China's foreign exchange policy, stressed that there has
not been a sign of one-way market expectation so far although the yuan is losing
ground to the rallying dollar.
--GREATER TOLERANCE
USD/CNY has risen sharply so far this week, as the dollar index (USDX)
surged to a six-month high. On May 29, the yuan closed at 6.4188 against the
greenback, the lowest in more than four months. That followed after the PBOC set
the parity at 6.4021.
In addition, CFETS Weekly RMB Index, which measures the yuan relative to a
basket of 24 currencies, fell 0.26% last week, the first drop in seven weeks.
The market is increasingly nervous as the dollar's expected rally puts
pressure on the yuan, with some speculating the PBOC may be contemplating
intervention. Xiao disagreed.
"The current volatility is acceptable to policymakers. An outright
intervention may lead to outside criticisms, especially as the U.S is strictly
monitoring China's forex policy," Xiao said. In addition, further depreciation
of the yuan helps exports, which benefits the economy, Xiao said.
--INCREASED VOLATILITY
But the yuan will trade in a wider band in future under the joint effects
of depreciation pressure from a rallying dollar and the appreciation draw from
capital inflow, the researcher said.
The formula used by the PBOC to determine the next day's midpoint fixing
historically included three factors -- the yuan settlement rate against the U.S.
dollar at 4:30 p.m. (0830 GMT), changes in the trade-weighted basket of
currencies and the counter-cyclical factor. The first two are now used following
the central banks suspension of the CCF in January.
To Xiao, the large weighting of the currency basket in the formula
contributes to big price swings of the yuan.
"The yuan's exchange rate is still closely related to the change in the
dollar index because of the basket currencies factor in pricing formula.
Although the factor can reduce the yuan's volatility against the basket
currencies, it also limits the market-based movement," Xiao said.
The effective direction of the country's forex reform is to gradually
reduce the current weighting of the currency basket from 50% to zero, Xiao
suggested.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.