'Counter-cyclical' factor for yuan stopped

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The Chinese currency has strengthened against the dollar over recent months as foreign capital inflows have sped up and economic fundamentals have improved.
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Some Chinese banks have phased out the use of the “counter-cyclical” factor in the pricing mechanism of the yuan’s central parity rate against the greenback, according to an online statement of the country’s forex regulator.

Market-making banks have made the move on their own initiative based on their judgment of economic fundamentals and market situations, according to the China Foreign Exchange Trade System.

The adjustment could help improve the transparency and effectiveness of the yuan’s existing pricing model, the CFETS said.

Some analysts said they were not surprised at the move as the use of this X-factor — an adjustment contributor banks make to the daily trade-weighted reference rate the People’s Bank of China uses to guide the yuan — was meant to dampen depreciation pressure, and its effect has diminished recently as the yuan rallied.

Chinese yuan weakened 206 pips to 6.7195 against the US dollar on Wednesday, according to the CFETS.

The Chinese currency has strengthened against the dollar over recent months as foreign capital inflows have sped up and economic fundamentals have improved. The onshore yuan has gained more than 6 percent against the dollar since May.

“Given that there is no longer any depreciation concerns, it makes sense to do away with the counter-cyclical factor, and reducing the reserve requirement ratio as they have done a couple of weeks back,” said Khoon Goh, head of Asia research at ANZ.

Goh added that economic fundamentals were still in favor of the Chinese currency, and yield differentials between China and other major economies should continue to attract capital inflow to support the local currency.

China first introduced the counter-cyclical factor in 2017 in what regulators said was an effort to better reflect market supply and demand, lessen possible “herd effects” in the market and help guide the market to focus more on macro-economic fundamentals. It has since adjusted its methodology a number of times to keep the currency stable.

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