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Bloomberg
Bloomberg
Business
Huang Zhe

PBOC Dropped Market-Based Yuan System in January, WSJ Says

The People’s Bank of China scrapped its market-based mechanism for managing the yuan on Jan. 4 and returned to setting the exchange rate based on what suits authorities the best, the Wall Street Journal reported, citing unidentified people close to the central bank.

An unidentified official from the PBOC in March told economists and bankers that “the primary task is to maintain stability” when they asked the central bank to stop fighting markets and let the yuan’s value fall at a closed door meeting, citing previously undisclosed minutes of the gathering.

The Chinese currency’s daily exchange rate is now back under tight government control, though the reversal hasn’t been announced, according to the newspaper. The PBOC guides the daily direction of the yuan by alternating between setting its value against the dollar and a basket of currencies, WSJ said, citing people close to the central bank. The central bank’s press office didn’t respond to requests from WSJ for comment. The yuan will be become an official reserve currency this year when it becomes part of the International Monetary Fund’s Special Drawing Rights.

Key Priority

"Our view was already along these lines, so we’re not that surprised," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. "Outflows after August were quite a scary hit to financial markets. After the yuan entered SDR, opening up the capital account was no longer a key priority, while yuan stability became a key priority. But we think beginning from March the fixing has started to follow the mechanism more."

A resurgent greenback is shaking up a strategy that the PBOC pursued over the past three months -- a steady rate against the dollar, combined with depreciation against other major currencies. The yuan has now fallen to a three-month low versus the U.S. currency while climbing to an almost four-week high versus a basket of peers. While there are few signs of the fear that gripped global markets in January, when the yuan sank 1.5 percent in just a week, investors are watching the currency as a barometer for the health of the world’s second-largest economy.

China devalued its currency by the most in two decades in last August, ending a de facto peg to the dollar that had been in place since March, 2015. At a meeting with senior officials in December, President Xi Jinping called China’s regulatory system “immature” and said most officials hadn’t done enough to guide the economy toward more sustainable growth, the WSJ said, citing people who attended the meeting.

(Updates to add quote in fourth paragraph.)

To contact the reporter on this story: Huang Zhe in San Francisco at zhuang37@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Andrea Snyder at asnyder5@bloomberg.net, Jonathan Annells, Richard Frost

©2016 Bloomberg L.P.

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