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China to shift renminbi market guidance to ward off depreciation

China’s central bank will change the way it guides the renminbi exchange rate, a move that appears designed to discourage renminbi depreciation at a time when authorities are still concerned about capital flight.

China’s central bank permits the dollar’s value against the renminbi to fluctuate by two per cent above or below a so-called “central parity rate” published each morning, also known as the midpoint price.

The midpoint is ostensibly formulated by compiling quotes from a group of large banks that are active as dealers in the onshore forex market, but the price is understood to be influenced by the central bank.

In August 2015, the People’s Bank of China announced a change to the way it would formulate the midpoint, saying that it would formulate the fixing based primarily on the previous day’s closing price in the spot market.

In December, it modified the formula, saying that the midpoint would also reference changes in the renminbi’s value against a trade-weighted basket of global currencies.

Under the latest formula announced on Friday, dealers will incorporate a “counter-cyclical factor” in their quotes, according to a statement on the website of the China Foreign Exchange Trading System, an industry body controlled by the PBoC.

The additional variable will prevent excessive one-way movements in the midpoint at a time when both of the other two factors are pushing in the same direction, the statement said.