China: Adding a “countercyclical factor” to gain control on exchange rate policy - Natixis

Sandeep Kanihama FXStreet Contributor

Alicia Garcia Herrero, Chief Economist at Natixis, explains that looking in detail at the way the fixing is now set, they conclude that it basically helps the PBoC regain further control on the RMB fixing (mid-point rate) against the USD since the PBoC is the only actor to have full control over each of the reporting banks’ own mid-point estimations.

Key Quotes

“Beyond that, we also find evidence that this new addition to the calculation of the fixing has been used so far to reduce daily exchange rate volatility and also to push the exchange rate towards mean-reversion. In other words, it helps the RMB appreciate against the USD during a period of depreciation pressures and to depreciate in a period of appreciation pressures.”

“All in all, there is no doubt that an instrument that reduces volatility and stabilizes the exchange rate can only been seen with good eyes but the PBoC. This is even more the case as far as the new mechanism also allows the PBoC to regain more control over the RMB’s exchange rate determination.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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