PBOC’s Bold Move: USD/CNY Reference Rate Shifts to 6.8764, Breaks From 6.8838 Precedent

The People’s Bank of China (PBOC) set the USD/CNY central rate at 6.8764 on Monday, slightly below the previous Friday’s fix of 6.8838 and market expectations of 6.8739. Significantly, the USD/CNY closed near 6.8676 the previous day. The PBOC also released data for the Open Market Operations (OMO), with calculations by Reuters suggesting that the Chinese central bank injected a net of ¥16bn ($2.3bn) on Monday. The PBOC held its seven-day repo rate unchanged at 2% on the day, according to its update.

China’s central bank still maintains strict control of the yuan’s rate on the mainland. The exchange rate of the onshore yuan (CNY) differs from that of the offshore one (CNH) in trading restrictions, as the latter is not as tightly controlled. Every morning, the PBOC sets a so-called daily midpoint fix, which is based on the yuan’s closing level from the previous day and quotations taken from the inter-bank dealer. The PBOC’s actions have visible consequences on the exchange rate between the yuan and major global currencies such as the US dollar, as well as on the bilateral trade relations between China and other countries. 

In its recently released Global Economic Prospects report, the World Bank stated that China’s economic growth is expected to slow to 5.9% in 2021 from the estimated 8.5% in 2020 due to tighter credit conditions and fiscal consolidation. This highlights the importance of maintaining a stable foreign exchange rate, particularly given the ongoing US-China trade conflicts and global economic uncertainties caused by the Covid-19 pandemic.

As part of the effort to maintain stability in its foreign exchange market, the PBOC enacted several measures in recent years. This includes a “countercyclical factor” in the fixing mechanism, which allows the central bank to counter depreciation pressure on the yuan. Moreover, the central bank has also enhanced the flexibility of the exchange rate to make it more market-oriented in line with China’s efforts to internationalise its currency. 

However, the stringent control over the yuan’s rate is sometimes controversial. In particular, pressures have mounted for China to loosen its grip on the currency, with critics claiming that it contributes to global trade imbalances and enables China to manipulate its currency to gain competitive advantages. The issue of currency manipulation has been a key part of President Trump’s trade war against China, with the US levying tariffs on $550bn worth of Chinese goods, which have caused retaliatory tariffs on $185bn worth of US products from China. 

Over the years, the PBOC has made efforts to liberalise China’s currency management, including introducing a more market-driven exchange rate system by widening the daily trading band and allowing greater participation by market participants. While it is still tightly managed, the exchange rate is expected to play an increasingly important role in China’s ongoing efforts to reform its economy and deepen its financial markets.

In conclusion, the recent PBOC update highlights the significance of the Chinese central bank’s efforts to maintain stability in its foreign exchange market as the yuan’s exchange rate plays a crucial role in the country’s economic growth and global trade stability. It remains to be seen whether China will continue to embrace a more flexible and market-oriented exchange rate system by loosening its grip on the yuan’s rate, especially given the mounting pressure and criticism from its trading partners, such as the US.


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