Sources: China modifies yuan midpoint mechanism

Chinese Yuan

According to three sources with direct knowledge of the matter, China has adjusted its formula for setting daily reference midpoints for its yuan currency on Monday. Sources say it was a move to help restrain speculation in the currency.

Ever since China’s foreign exchange reserves dropped below $3 trillion in January, the global attention on the country has increased but currency traders said it was too early to determine if the changes were anything more than technical in nature.

The currency is only allowed to trade in a narrow daily band which is defined by a midpoint fixing rate set by the market regulator every morning.

Movements in other currencies of China’s trading partners is one of the factors the regulator utilizes to calculate its midpoint.

Banking sources said that Monday’s adjustment by the operator of the foreign exchange trading platform decreases the reference period for those currencies.

The China Foreign Exchange Trade System (CFETS) lowered the reference period of yuan trading against its trade-weighted basket to 15 hours from the previous system’s 24 hours.

According to the sources, the latest adjustment was made in order to reflect the changes in the forex markets more accurately and help curb intraday speculative trading activity.

A trader at a Chinese bank said: “The latest move was more like a debugging, as changes in the yuan value (against the currency basket) during the daytime trade were counted twice in the old mechanism”

He said that the 4:30pm official closing price already included the changes in the yuan’s value against the basket during the day.

The CFETS altered the composition of the CFETS basket that is used to determine the yuan’s daily value on December 29. The number of currencies in the basket was increased from 24 from 13 starting from the beginning of 2017.

The People’s Bank of China set the midpoint rate at 6.8743 per dollar on Monday before the market open.

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