© Reuters. FILE PHOTO: US dollar and Chinese yuan banknotes are shown in this illustration taken on January 30, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
Written by Georgina Lee
HONG KONG (Reuters) – The yuan has lost nearly 5 percent of its value against the dollar this year, and in recent weeks China’s central bank has begun to push back the slide, setting the currency’s daily trading range at stronger-than-expected levels.
Some analysts suggest that the stronger reform is due to the “counter-cyclical factor” (CCF), which is a modification of the trade scope formula to give the authorities more freedom.
Here’s a look at how that works:
What is the daily fix?
The yuan is not a fully convertible currency and the internal exchange rate is a managed floating rate. The spot dollar/yuan is allowed to trade 2% on either side of a fixed midpoint each day.
The midpoint is calculated by the China Foreign Exchange Trading System (CFETS), a unit supervised by the People’s Bank of China before the domestic market opens at 09:30 am (0130 GMT)
How is it calculated?
CFETS is seeking quotes from a panel of 14 market-making banks and producing the fix based on their input.
Banks refer to the closing price from the previous day, overnight dollar movements or shifts in baskets such as the CFETS RMB Index, and market supply and demand conditions before submitting a number to the CFETS.
A source told Reuters last year that banks were required to apply a “countercyclical factor” to their accounts, and adjust their applications to CFETS accordingly.
What is the opposite periodic factor?
First introduced in 2017, regulators said the CCF framework was an attempt to better reflect supply and demand, guiding market participants to focus more on macroeconomic fundamentals.
The central bank never disclosed how the CCF was calculated, but analysts said its aim was to mitigate the impact of the official closing rate, calculated at 4:30 pm (0830 GMT), on the next day’s fix. Suspended in 2020.
Market makers are allowed to discount the closing price, as it is deemed inconsistent with their expectations.
Why is the CCF seen as a move to defend the yuan?
It appears in times of weak yuan. The CCF was abandoned in 2020 when the yuan appreciated sharply and the authorities decided to let market forces play a bigger role.
But in what analysts see as a sign of its recovery, in the last week of June alone, stronger-than-expected daily fixes were identified by market participants in four sessions out of five and in two cases significantly. The trend continued this week.
Analysts see it as more of a signal than necessarily an effective tool for steering the currency, which fell 5.3% against the dollar in the most recent quarter.
“We believe that the CCF adjustment will continue in the coming days to slow the yuan’s decline, but we do not expect the People’s Bank of China to draw a firm line in the sand or attempt to forcibly reverse the trend,” HSBC analysts said in a research note. .