May 27, 2017 12:21 am JST

Beijing changing yuan-fixing formula to curb currency slides

Step back from market-driven rate undoes recent reforms

ISSAKU HARADA, Nikkei staff writer

The People's Bank of China sets the midpoint for trading in the yuan each day.

BEIJING -- China's central bank is planning a new method for fixing the yuan's daily exchange rate against the U.S. dollar that aims to fend off rapid depreciation -- though at the expense of recent efforts to liberalize the country's financial markets.

The People's Bank of China sets a reference rate for the yuan each morning that acts as a midpoint for market trading. The yuan is allowed to move 2% above or below this level each day against the dollar.

Currently, this rate is set based on the previous day's market close. But the central bank will soon adopt a method that will ensure fairly modest changes to the reference rate each day, even when the yuan's market exchange rate shifted significantly the day before. Precisely how the rate will be calculated has not been revealed. Market players such as banks have been notified of the change.

The PBOC suddenly began factoring the market's close into its reference rate calculation in August 2015, letting the yuan, which had been kept artificially strong, move closer in line with market sentiment. The new system had a fairly rocky start: Sharp declines in the yuan's value over the first few days led some to accuse China of intentionally devaluing its currency.

This time, the bank will be walking back from a market-driven rate, aiming to keep the yuan relatively stable against the dollar as expectations that the U.S. Federal Reserve will hike interest rates in June gain ground. This has stirred concerns that the Chinese authorities could begin to simply adjust the reference rate to their liking. Beijing's attempt to turn the yuan into a truly international currency, in part by liberalizing its currency market, seems to be losing speed.

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