The People’s Bank of China (PBOC) holds great influence over the value of the yuan since it is the PBOC that sets the daily midpoint fix each morning, after considering the yuan’s previous day’s closing levels and quotations obtained from the inter-bank dealer. The practice prevents the yuan from trading too widely outside of predetermined parameters. The exchange rate for the yuan does not always get to be determined by market demand for either the onshore yuan (CNY) or the offshore yuan (CNH). The onshore yuan rate differs from the offshore one in trading restrictions, with the latter not being as tightly controlled by the government.
However, the yuan has experienced several fluctuations through the years, often in response to political decisions or economic trends. While the PBOC has the power to halt such fluctuations, this is not always the best decision and poses its own dangers.
In recent trade onshore yuan hit 6.8658 to the US dollar, slightly up from its last close of 6.8721. This came after the PBOC lowered the daily fixing by 69 pips to CNY6.8688 to a US dollar. Throughout the rest of the day, sentiment and analysis from various sources would work with the guidance from the PBOC to shape the yuan’s value in the currency markets.
The central bank’s control of the onshore yuan rate has been questioned by some economists, as its actions have led to a lack of transparency in the system. Additionally, concerns have been raised over the extent of the PBOC’s intervention, which has the possibility of creating distortions in the yuan’s real value against other currencies, particularly the US dollar.
In a move to stabilize fluctuations, the PBOC has implemented certain policies that have prompted more market-driven volatility in the rate. These interventions include allowing the yuan to move in a wider band and letting it fall below its trading range during offshore trading.
Offshore yuan trading occurs in three main centers, Singapore, London and Hong Kong, with Hong Kong representing the most significant market as the majority of offshore yuan deposits are found in the city. By allowing an element of market influence, the PBOC has the potential for establishing a more transparent approach to the yuan’s value and allowing it to become more predictable in the long term.
There have also been recent reports of the PBOC abandoning the daily fixing of the counter-cyclical factor in the onshore yuan exchange rate formation mechanism, which it started using in 2017. This refers to a policy through which the PBOC controls the value of the yuan by intervening in the market, buying a selling yuan when required. It is speculated that the counter-cyclical factor was first used due to a fear of a currency trend impacting the PBOC’s effort to keep the yuan more stable.
Such moves may be successful, but also dangerous, such as when the PBOC sparked a devaluation of the yuan back in August 2015 by loosening its daily fixing too much. This caused significant turbulence in the exchange rate, taking many people by surprise and leaving questions over the PBOC’s role.
More recently, there have been concerns over the impact that US President Donald Trump’s trade war with China will have on the yuan. The onshore yuan has weakened by around 6% against the US dollar since the trade war began in June. If the yuan’s value does not stabilize soon, it could lead to further depreciation, which could have far-reaching consequences for the global economy. Despite the challenges the PBOC faces in regulating the yuan, its tight control does offer a sense of security that drastic changes can be dealt with effectively, though often at the expense of transparency.
