In recent trade, the People’s Bank of China (PBOC) set the yuan at 6.8731 vs the previous fix of 6.8814 and the prior close of 6.8766. The PBOC maintains strict control of the yuan’s rate on the mainland by setting a so-called daily midpoint fix; this move is based on the yuan’s previous day’s closing level and quotations are taken from the inter-bank dealer. The onshore yuan (CNY) is different from the offshore yuan (CNH) due to trading restrictions; the latter not being as tightly controlled as the former.
The People’s Bank of China (PBOC) is the central bank of the People’s Republic of China and is responsible for the country’s monetary policy and regulation of its financial institutions. An integral part of its function is the daily setting of the yuan’s rate, referred to as the fix, which it does each morning in Beijing. This fixing determines the midpoint for the yuan’s trading range against a basket of global currencies, from which the yuan is allowed to rise or fall in value up to 2% each day. This mechanism allows the PBOC to maintain a degree of control over the currency’s value and stability.
In practice, the daily fix is based on the previous day’s closing level and quotations taken from a group of contributing banks (inter-bank dealers). Each dealer submits an indicative price to the PBOC, and a weighted average is calculated to set the fix. This calculation incorporates a range of factors, such as interest rate differentials, the previous day’s dollar-yuan closing rate, and recent fluctuations in global foreign exchange markets.
The trading restrictions placed on the onshore yuan (CNY) have given rise to a separate market, the offshore yuan (CNH). While the CNY is traded only on the mainland, the CNH trades outside of mainland China, primarily in Hong Kong. The CNH is not subject to the same degree of central control, and as a result, its value can occasionally diverge from that of the CNY. However, the PBOC and Hong Kong Monetary Authority work together to align the two exchange rates, and the difference between the two has narrowed in recent years.
The PBOC can use the daily fix to control the yuan’s value amid political and economic considerations. For example, as China seeks to gain wider acceptance for the yuan as a global reserve currency, one of its goals is for the International Monetary Fund (IMF) to include it in its basket of Special Drawing Rights (SDR) currencies. A more stable and market-determined exchange rate would improve the chances of this happening. Additionally, a more market-driven trading environment would make it easier for China’s trading partners and global investors to do business with the country.
Furthermore, the PBOC can use the daily yuan fix to communicate its future policy intentions or to counter speculative behavior in the market. For instance, if investors believe the yuan is undervalued and due for appreciation, the PBOC may set the fix at a stronger level to signal that it is aware of these concerns and that it is taking action to address them.
On the other hand, the daily fix can also be a source of tension between China and other major economies. The US has accused China of manipulating its currency to gain a trade advantage, claiming that a weak yuan makes Chinese exports cheaper and more attractive. The US has called for China to allow greater market forces to determine the yuan’s exchange rate, and it has been suggested that China may be slowly moving in this direction as it seeks to transform its economy to a more consumption-driven model.
Overall, the daily yuan fix is an essential tool for the PBOC in managing China’s exchange rate and maintaining stability in the country’s financial system. While the daily fix has been the subject of some controversy, it remains a key factor in the global financial landscape, and it is essential for investors, traders, and policymakers to understand how it works and the role it plays in the global economy.
