Investors misunderstood the People's Bank of China's intentions in its recent moves on the yuan's daily reference rate against the US dollar, a top central bank researcher said, days after a 0.5 per cent devaluation contributed to global market turmoil.
While analysts at JPMorgan Chase & Co have said the weaker fixings were a "clear confirmation of a shift in the mindset of Chinese authorities" in favour of a weaker yuan versus the greenback, Ma Jun, chief economist at the PBOC research bureau, said the fixings are based on the previous day's closing price and changes to the basket of currencies against which the yuan is valued. Ma's comments were posted Monday on the central bank's website.
The remarks suggest the PBOC is trying to correct the impression that China intentionally weakened the yuan by setting the fixing lower last week. Instead, downward pressure on the yuan will ease after investors absorb a shift to valuing it versus a basket of currencies and away from linking it to the US dollar, Ma said.
"Some of the market participants recently tried to determine the PBOC's intentions by looking at the change in the fixing rate versus the previous day," Ma was quoted as saying. "This is a misunderstanding. The fixing is determined by factors including the closing price of the previous day and the changes of the currency basket. Market participants should look at the differences between fixing and the closing prices, and the changes of the currency basket."
The PBOC's January 7 weakening of the yuan-dollar fixing by 0.5 per cent capped eight straight days of lowering the reference rate by the central bank. Chinese stock exchanges closed early that day for the second time in a week after the CSI 300 Index plunged more than 7 per cent. The turmoil helped send the Standard & Poor's 500 Index of stocks to its worst-ever start to a year in data going back to 1928.
The yuan shouldn't be pegged to the US currency and its rate will be more tied to a basket of currencies in the future, Ma said. At the same time, the PBOC will "appropriately limit" daily yuan-dollar volatility, he said.
Pegging the yuan to a single currency would lead to high volatility of the country's trade competitiveness, an increasing imbalance of international payments and more arbitrage activity, according to the comments.
The PBOC last month published a new index that values the yuan against a broad range of currencies. The move by the China Foreign Exchange Trade System, which is run by the central bank to facilitate interbank trading, sent the currency lower on speculation that policy makers want to reduce its link to the dollar and let it weaken further.