Yuan up as China restarts ‘counter-cyclical factor’

By Xie Jun Source:Global Times Published: 2018/8/27 17:18:40

Move will offset exchange rate’s fluctuation tendency: expert

The yuan hovered at a two-and-a-half-week high against the dollar on Monday following the Chinese central bank's move to restart the "counter-cyclical factor" in the pricing mechanism of the currency's central parity rate.

The onshore yuan opened at 6.8080 per dollar, the strongest level since August 8, while the offshore yuan rose to 6.7818, its strongest since July 31.

"The yuan's appreciation should be a direct result of the restart of the counter-cyclical factor," Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times.

 The yuan's central parity rate against the US dollar edged up by 202 basis points to 6.8508 on Monday, according to the People's Bank of China (PBC). The PBC announced on Friday that it had reactivated the "counter-cyclical factor" in the yuan's reference rate pricing mechanism.

According to Zhou, the counter-cyclical factor is a system that will offset the exchange rate's fluctuation tendency. As such, when the yuan appreciates or depreciates too much, the counter-cyclical factor will help iron out the fluctuation.

The factor was introduced into the yuan's central parity rate in May 2017. Then, in early 2018, the government turned the counter-cyclical factor to neutral, halting its adjustment function, as China's cross-border capital flow and foreign currency supply and demand had reached a balance by then, according to the PBC statement.

"Nowadays, because of the China-US trade dispute, the yuan showed a depreciating trend in recent weeks. The PBC then decided to use the counter-cyclical factor as a lifting force," Zhou said.

A depreciating yuan would be beneficial to exports, which would balance out domestic traders' losses from the tariff dispute. "But I think the government still wants to show the world that it has no intention of letting the yuan depreciate as well as its stance that it does not want to exacerbate trade frictions with the US," Zhou said.

Zhou cautioned that if the China-US trade dispute worsens, the yuan would still face depreciation pressure.

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