SHANGHAI, Sept 12: The People’s Bank of China (PBOC) set a record high official guidance rate for the yuan on Thursday but is intervening to hold back the spot price, traders said, signalling the bank is modifying its forex management strategy as it prepares for the next round of liberalisation.
The PBOC fixed its official midpoint at 6.1575 versus the dollar on Thursday, its highest since the domestic foreign exchange market was established in 1994, toppling the currency’s historical record high of 6.1598 set on June 17 and up from Wednesday’s 6.1601.
But in trading, the central bank appears to have acted to curb expectations of yuan appreciation, working through intermediary traders at major state-owned banks to keep the spot yuan at 6.1186 per dollar at midday, almost unchanged from Wednesday’s close of 6.1185.
‘The PBOC appears to have adopted a new tactic,’ said a trader at a Chinese commercial bank in Shanghai.
‘A stronger midpoint narrows the gap between the midpoint and the spot price, making it possible for the yuan to fluctuate more widely in the future and paving the way for further currency reforms.’
The trader was referring to market expectations that the PBOC’s next reform will be to widen the yuan’s trading band and introduce more bidirectional volatility into the market. At present the exchange rate is allowed to rise or fall by 1 percent from the midpoint fix.
Since the band was widened in early 2012, the central bank has frequently used the midpoint as a leash to keep the spot yuan rate from rising or sinking too dramatically.
While this has reduced the risk that speculation in one direction or the other would destabilise trade and capital flows, the tactic has also made it difficult for the PBOC to widen the band, as it would only give speculators more scope.
By strengthening the midpoint so it is more in line with market expectations, while at the same time signalling it will not allow the spot price to spike, it could be a signal that widening is imminent.
However, some traders argued regulators may hesitate to implement the change immediately so long as the general trend of depreciation of Asian currencies in recent months continues.
The change of methodology Has coincided with a pledge by Chinese Premier Li Keqiang to push ahead with reforms.
‘China is at a critical stage of restructuring and updating its economy,’ Li said in a speech to government leaders and company executives at the World Economic Forum in the northeastern port city of Dalian on Wednesday.
‘China can only sustain economic growth by transforming its growth model. Financial reform is one of the important parts of China’s economic structural reform,’ he said, noting that convertibility of the yuan currency and interest rate reform will be the focus.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct)
PBOC midpoint 6.1575 6.1601 +0.04
Spot yuan 6.1186 6.1185 0.00
Divergence from midpoint* -0.63
(pct)
Spot change ytd +1.83
Spot change since 2005 revaluation +35.27
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The offshore yuan market at a glance
Instrument Current Difference from
Onshore (pct)
Offshore spot yuan 6.1093 +0.15*
Offshore non-deliverable 6.2165 -0.95**
Forwards
* Premium for offshore spot over onshore
* Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint. (AGENCIES)
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