The People’s Bank of China (PBOC) set the USD/CNY central rate at 6.9158 on Monday, as opposed to the previous fix of 6.9114 and market expectations of 6.9159. The USD/CNY had closed near 6.9080 the previous day. China maintains strict control of the yuan’s rate on the mainland, while the onshore yuan (CNY) differs from the offshore one (CNH) in terms of trading restrictions, since the latter is not as tightly controlled.
In addition to the USD/CNY fix, the PBOC also revealed the numbers for its open market operations (OMO), which implies that the Chinese central bank injects CNY 2.0 billion ($303.9 million) via 7-day reverses repos at a 2.0% rate. The purpose of OMO is to ensure there is an appropriate level of liquidity within the banking system, as well as to manage deviations in the short-term interest rate.
The daily reference rate of CNY to USD is calculated based on the weighted average of prices from the interbank forex market during the opening hours, around 9:15 AM local time. The daily USD/CNY midpoint fix provides the basis for the renminbi foreign exchange rate, around which the Chinese yuan can then move during market hours. The National Interbank Funding Center, which is supervised by the People’s Bank of China, determines and announces the central parity rate on each business day.
China’s foreign exchange market has a managed floating exchange rate system, of which the central parity rate of RMB to USD plays an essential part in maintaining. The system is based on market supply and demand and regulated through a basket of currencies. China moved the yuan to a managed float against a basket of currencies in July 2005, thereby ending the long-standing peg to the US dollar.
The yuan’s daily reference rate had been kept artificially low because of China’s attempts to prevent the capital outflow. However, the process has been criticized as opaque, leading to suspicion that PBOC might sometimes take advantage of this opacity. In recent years, the PBOC has made efforts to improve the calculation mechanism of the RMB-to-USD central parity rate to make it more market-driven and transparent. In 2015, China reformed its USD/CNY fixing mechanism and allowed the fix to be based on the previous day’s closing spot rate in the interbank market, giving more weight to market forces.
The onshore yuan (CNY) and offshore yuan (CNH) are subject to different trading restrictions, with the latter not as tightly controlled. The CNY and CNH have different interest rates and are traded on separate markets, and each has its own short-term liquidity system. The CNH interest rate typically trails its onshore peer, and the divergent interest rates reflect differences in liquidity constraints in the two markets. The CNH market has evolved as a pricing benchmark for the onshore rate, while the offshore CNH rate is typically viewed as a better forecast of the onshore rate.
Each morning, the People’s Bank of China (PBOC) sets a so-called daily midpoint fix for the Chinese yuan. The fix is based on the yuan’s previous day’s closing level and quotations from the interbank dealer. If the Chinese central bank does not intervene, the spot rate of the CNY usually trades close to the midpoint. While the CNH rate is not subject to the same limits on daily moves or policy intervention in the onshore market, it is still closely tied to the onshore rate, and since the 2005 depegging, the CNH market is increasingly influential as an indicator of the direction and future level of the CNY.
