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Yuan should rise faster after phasing out of counter

作者:admin 2020-10-29

Yuan should rise faster after phasing out of counter

Renminbi Photo: VCG

Despite a dropping reference rate on Wednesday, the yuan, which is in a cycle of appreciation as a result of improving economic foundations, should rise even faster in the long run as China announced to gradually fade out the counter-cyclical factor in its reference rate system, experts said. 

The yuan's reference rate against the greenback edged down by 206 basis points to 6.7195 on Wednesday, according to data published by the People's Bank of China (PBC), China's
central bank

One day earlier, China's Foreign Exchange Trading Center announced on Tuesday to gradually "phase out" the usage of counter-cyclical factor in the yuan's central parity exchange rate system, based on "judgement about market situation and China's economy." 

Introduced in 2015, the counter-cyclical factor, an adjustment contributor banks make to the daily trade-weighted reference rate the PBC uses to guide the yuan, was meant to dampen depreciation pressure when the yuan was sliding fast in value. 

Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, said that the counter-cyclical factor's function is to prevent the yuan from moving too strongly in either direction. However, it is not a transparent mechanism for the ambiguities of its operation theory; it also runs counter to market reforms and will be cancelled "sooner or later." 

"Removal of the factor shows the policy trend to let market forces, instead of government intervention, decide the yuan's operation," Zhou told the Global Times on Wednesday. 

According to Zhou, he is not sure about the relation between the reference rate's drop on Wednesday and the removal of the counter-cyclical system. But in the long run, it should theoretically lead to more intensified fluctuation of the currency

"As the yuan is under pressure of appreciation now, it should rise even faster with the factor being removed," Zhou said. 

The yuan has risen against the US dollar over recent months as China's economic fundamentals improved and the coronavirus epidemic was successfully under control. Since late May, the onshore yuan has gained about 6 percent. 

Global Times

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