China adjusts yuan midpoint mechanism - sources

SHANGHAI (Reuters) - China tweaked its formula for setting daily reference midpoints for its yuan currency on Monday, three sources with direct knowledge of the matter said, in what was seen as authorities’ latest move to help curb speculation in the currency.

FILE PHOTO - 100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. REUTERS/Jason Lee/File Photo

Global attention on China’s exchange rate policy has intensified since its foreign exchange reserves fell below the $3 trillion level in January, but currency traders said it was too early to say if the latest changes were anything more than technical in nature.

The tightly managed currency is allowed to trade in a narrow daily band which is defined by a midpoint fixing rate set by the market regulator each morning.

One of the components the regulator uses to calculate its midpoint is the movements in other currencies of China’s trading partners.

Monday’s adjustment by the operator of the foreign exchange trading platform shortens the reference period for those currencies, banking sources said on the condition of anonymity.

The China Foreign Exchange Trade System (CFETS) reduced the reference period of yuan trading against its trade-weighted basket to 15 hours (from 4:30 p.m. (0830 GMT) to 7:30 a.m. (2330 GMT) from 24 hours under the previous system.

The sources said the latest adjustment was meant to better reflect changes in the forex market, and help curb intraday speculative trading activity.

Traders said the change would make the yuan midpoint more “reasonable”, but believed its impact on the foreign exchange rate would be very limited.

“The latest move was more like a debugging, as changes in the yuan value (against the currency basket) during the daytime trade were counted twice in the old mechanism,” said a Shanghai-based trader at a Chinese bank.

He said the 4:30 p.m. official closing price already included the changes in the yuan’s value against the basket during the day.

The People’s Bank of China also takes overnight changes in the U.S. dollar into account in its midpoint calculation, as well as estimates from market contributors on the yuan’s value.

The FX trading platform operator declined to comment on the matter when contacted by Reuters.

The central bank, which oversees the FX trading platform operator, has been trying to reform the way it manages the yuan by making it more market-driven and transparent.

On Dec. 29, the CFETS changed the composition of the CFETS basket that is used to set the yuan’s daily value. Starting from the beginning of this year, the number of currencies in the basket was increased to 24 from 13.

On Monday, the PBOC set the midpoint rate at 6.8743 per dollar prior to the market open, weaker than the previous fix of 6.8456.

The spot yuan weakened against the dollar, and settled at 6.8782 as of 0830 GMT.

Despite interventions by state-owned banks, the yuan lost 6.6 percent of its value against the surging dollar last year, its biggest annual fall since 1994 and prompting authorities to tighten restrictions on capital outflows.

It has recouped about 1.2 percent so far this year as the dollar lost steam, but most market watchers expect the yuan to resume its depreciation soon if the U.S. central bank continues to slowly raise interest rates.

Reporting by Shanghai Newsroom; Editing by Shri Navaratnam and Kim Coghill