[BEIJING] A Chinese state-run bank has revealed the inner workings of the yuan's reference rate mechanism, including details on the lenders that provide prices as well as how the system was tweaked following market turmoil in January.
The 14 contributors, which must consider the previous day's yuan closing price price, have to take into account movements in baskets of currencies and have the leeway to consider the effects of client supply and demand, said Sun Wei, deputy general manager of financial markets at China Citic Bank Corp, a unit of China's largest state-run financial conglomerate. He added that the People's Bank of China spoke with lenders in February before standardizing the system.
The details provided by the state-backed bank come amid increased focus on the currency as a resurgent dollar pushes the yuan close to a five-year low. The PBOC said last week that it has increased the two-way flexibility of the exchange rate and maintains basic stability, following a Wall Street Journal report that said the monetary authority had scrapped its market- based mechanism.
The fixing responds to dollar moves asymmetrically, analysts at banks including Barclays Plc, Deutsche Bank AG and Bank of America Corp have said this month.
"Our fixing model, and I suppose most analysts' models, is based on the factors described, that is the previous day's closing price and the overnight movement in the basket of currencies," according to Tim Condon, Singapore-based head of Asia research at ING Groep NV, who had said in a Feb 24 note that the fixings were as "black-box" as ever. "If the PBOC adheres to the policy, our models should be getting better and better at forecasting the daily fixing rate."
The contributors are core market makers and conduct a majority of trades, said Mr Sun. Efforts to prevent market manipulation include a bar on collusion between contributors and elimination of some of the highest and lowest quotes. The PBOC had said in its first-quarter monetary policy report that the daily reference rate takes both the previous day's closing price and changes in currency baskets into account.
The yuan's 1.6 per cent decline this month has investors and analysts watching for any repeat of the turmoil ignited by a surprise devaluation in August, which spurred an estimated US$1 trillion in annual capital outflows, or the volatility in January that roiled global markets. Increasing outflows will fail to spark the same alarm this time round because the PBOC has many policy tools to manage the depreciation, Song Yu, China economist for Goldman Sachs/Gao Hua Securities Co said in a May 26 interview.
"I don't place a great deal of weight on the fix unless we see a huge divergence between what the mechanism suggests and what the fix is," said Sue Trinh, Hong Kong-based head of Asian foreign-exchange strategy at Royal Bank of Canada. "I stopped caring around the end of August last year, in the sense that it became obvious a large amount of discretion was being used in setting the fix."