China’s Stronger Yuan Fixings Spark Talks of Formula Adjustment

(Bloomberg) — China kept up its resistance against yuan weakness by setting a stronger-than-expected currency fixing for a seventh straight day, prompting speculation of a possible adjustment to the mechanism to prevent the yuan from further depreciation.

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The People’s Bank of China set the fix at 6.8821 per dollar, 103 pips stronger than the average estimate in a Bloomberg survey of analysts. While the move was milder than Tuesday’s, when the fixing bias was the second-strongest on record, it surprised traders. That’s because the onshore yuan on Wednesday closed near the PBOC fixing, indicating less need for intervention.

Some analysts say Thursday’s strong fixing could be a result of PBOC’s discretionary adjustment to its fixing formula known as the counter-cyclical factor (CCF). The measure was introduced in 2017 to include a policy preference of steering the yuan and officially scrapped in October 2020. At least two Chinese banks tweaked their models to lean against the yuan weakness last week, according to people familiar with the matter.

“I feel PBOC is already applying CCF to its fixing, but not officially announcing it” as it may not want such a foreign-exchange management policy to be openly acknowledged before the party congress, said Kiyong Seong, Lead Asia Macro Strategist at Societe Generale SA in Hong Kong. The objective of the CCF is to stem herding and guide the market’s expectations for the yuan to a more managed depreciation path, he said.

The recent spell of yuan weakness triggered by the PBOC’s unexpected rate cut last month has worsened following hawkish comments from the Federal Reserve and bets on bigger rate increases by the European Central Bank. Banks including Goldman Sachs Group Inc. are now forecasting a fall in the yuan to 7 per dollar, a level last seen in July 2020.

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The yuan’s losses are leading to speculation on whether the PBOC will use more forceful measures to rein it in. The PBOC had reduced bank’s foreign-currency reserve requirement ratio in April when the yuan slumped more than 4%. It could also soak up yuan liquidity in the offshore market to make it more costly to short the currency.

Policy makers will continue to try and dampen depreciation pressures and stabilize the yuan as much as possible ahead of the party congress that will begin on mid-October, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “But direct currency intervention by the PBOC is not likely, though state owned banks may be encouraged to sell dollars on any up move in dollar-yuan, ” Goh added.

The onshore yuan fell 0.2% to 6.9084 per dollar at 12:34 p.m. in Shanghai. The offshore yuan dropped 0.2% to 6.9187 per dollar.

(Updates throughout.)

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