In recent trade today, the People’s Bank of China (PBOC) set the yuan at 6.9299 in comparison to the previous close of 6.9200 and the estimate of 6.9301. The world’s attention has turned to the Chinese yuan and its daily “fix” as the US-China trade clash has escalated. China maintains stringent control of the yuan’s rate on the mainland, as it is able to actively manage the level of the currency’s midpoint.
The process of fixing the Chinese yuan involves two different versions of the currency: the onshore yuan (CNY) and the offshore yuan (CNH). The onshore version is subject to trading restrictions, whereas the offshore version is not as tightly regulated, allowing it to be influenced by market forces.
Every morning, the People’s Bank of China sets the midpoint rate for the yuan, using the currency’s closing level from the previous day as a starting point. The PBOC then combines this information with quotations taken from the inter-bank dealer in order to determine the daily midpoint fix. This measure is designed to help manage the currency’s movements to reflect market fluctuations.
The PBOC also intervenes if the yuan’s value fluctuates too far in one direction, ensuring the central bank plays an active role in maintaining the currency’s stability. This intervention can take the form of buying or selling the currency in order to influence its value. For instance, if the yuan weakens beyond a certain threshold, the central bank may take action to strengthen it, such as by selling foreign currency to increase demand for the yuan.
As a result of this tight control over the currency, the daily midpoint fix of the yuan has become an important gauge for interpreting the Chinese government’s policy stance toward the currency. While the central bank’s daily fix does take into account fluctuations in exchange rates, it ultimately determines the direction the currency moves.
Over the years, global market participants have scrutinized the PBOC’s currency fixing to better understand the country’s monetary policy, particularly as it relates to trade tensions or currency devaluations. With trade tensions between the US and China intensifying, the daily fix has garnered more attention than ever. That’s because some market participants believe China could use currency devaluation as a tool to counteract the impacts of higher US tariffs on Chinese goods.
However, it’s important to note that currency devaluation would be a double-edged sword for China, as it could create problems for Chinese companies that rely on imported raw materials, while international investors may become more hesitant to invest in the country. Additionally, a sharp depreciation of the yuan may also spark concerns about capital outflows, similar to the situation that occurred in 2015 and 2016 when China experienced a decline in its foreign exchange reserves.
As the trade dispute between US and China continues to evolve, investors and market participants are paying closer attention to the daily fix of the yuan. It’s also worth noting that the PBOC has recently made some adjustments to the way it calculates the midpoint, in an attempt to maintain the currency’s stability amid heightened global economic uncertainty. In light of this, the Chinese yuan’s daily fix is likely to remain a key market focus for the foreseeable future.