China’s central bank is under pressure to issue its weakest currency fixing in more than a decade, a move that risks spurring more losses in the yuan.
The People’s Bank of China set its daily currency reference rate only marginally stronger than 7 a dollar on Wednesday. That leaves it little headroom if it wants to track the spot rate, which fell 0.3% to 7.0463. While the yuan breached the key 7 level this week for the first time since May 2008, the fixing hasn’t.
At stake is the risk that markets will see Thursday’s reference rate as a signal on policy, as a string of fixings on the weaker side of 7 could exacerbate concerns around further yuan depreciation and capital flight. The central bank has already taken some steps this week to limit declines after the yuan sank the most in four years, including reassuring foreign companies that the currency won’t weaken significantly.
“Policy makers’ priority now is to limit the risks of capital outflows,” said Xing Zhaopeng, a markets economist at ANZ Bank China Co. He expects the PBOC will keep the rate stronger than 7 to maintain stability.
The fixing is published every trading day at 9:15 a.m., after a group of 14 lenders submit their rates. The yuan is then allowed to move 2% in either direction. The rates are calculated with formulas that take into account factors such as the previous day’s official close at 4:30 p.m, the yuan’s move against a basket of currencies and the moves in other major exchange rates.
The mechanism has been used to manage volatility after China removed the yuan’s peg to the greenback in 2005. Until at least 2015, traders weren’t able to offer prices that diverged from the fix by more than the allowed range. The last time the yuan tested the band was in February 2015, when it closed 1.99% weaker than the reference rate. The trading system was upgraded after the shock devaluation in August that year.
The yuan’s slump this week means the currency is once again taking the spotlight in China’s trade dispute with the U.S., stoking criticism Beijing is depreciating its currency to soften the impact of U.S. tariffs. Donald Trump’s administration labeled China a currency manipulator, a formal designation which may prompt counteractive measures. The PBOC rejected the accusation.
–Bloomberg
