China Phases Out ‘X-Factor’ in Pricing Yuan After Strong Gains
Zhou Ailin
DATE:  Oct 28 2020
/ SOURCE:  Yicai
China Phases Out ‘X-Factor’ in Pricing Yuan After Strong Gains China Phases Out ‘X-Factor’ in Pricing Yuan After Strong Gains

(Yicai Global) Oct. 28 -- China is winding up use of a key factor when fixing the mid-point rate of its currency in the wake of the yuan’s rapid appreciation against the US dollar. The move is a sign that the country’s central bank will allow the redback to fare more on its own, sources told Yicai Global.

Use of the counter-cyclical factor -- or so-called X-factor -- in setting the yuan’s daily reference rate is being phased out, the People's Bank of China's China Foreign Exchange Trade System said in a statement yesterday.

The central bank brought in the factor in 2017 to restrain a possible market “herd effects” as the yuan slid versus the dollar. But since the start of this year, the yuan’s central parity rate has climbed nearly 4 percent, while the currency pair's spot rate has gained about 3.7 percent and the offshore yuan has risen nearly 3.8 percent. 

“The intensity of the use of counter-cyclical factor has been quite weak since the second half of this year,” a foreign exchange trader said. Yesterday’s announcement had “more of a symbolic significance.”

The PBOC uses the central parity rate mechanism to set the yuan’s daily trading range in the onshore market. Spot rates may swing 2 percent above or below the quote.

The forex regulator said banks that contribute to the yuan’s pricing were phasing out the X-factor’s use of their own accord in light of economic fundamentals and the market situation. Bankers told Yicai Global that they had recently heard of the X-factor’s disuse.

The Chinese economy’s robust recovery and a sharp widening in the interest rate spread between China and the United States are key reasons for the yuan's rise, said Wu Zhaoyin, director of macro strategy at AVIC Trust.

An annual gain of 3 percent to 5 percent in the yuan is reasonable, he said, while anything more than that triggers reactions from all sides, undercutting the motivation for gains.

“The absence of an official announcement of [the X-factor’s] cancellation means flexibility for the central bank to raise the coefficient as needed in future,” traders at an institutional investors told Yicai Global. Such a statement “may be unnecessary in actual operation as the central bank can reduce the coefficient from 100 percent to 1 percent, equivalent to not including the factor.”

The PBOC seemingly aims to further signal future policies amid the yuan's rapid appreciation, the traders added.

"The direction of exchange rate policy has been market-oriented, but counter-cyclical adjustments are necessary when markets occasionally malfunction," Xie Yaxuan, chief macro analyst at China Merchants Securities, told Yicai Global. “These adjustments, however, should be less targeted and suspended in time, so that they can be re-used when the situation changes.”

Editors: Tang Shihua, Ben Armour

Follow Yicai Global on
Keywords:   Central Parity Rate,Foreign Exchange Market,Government Regulator,PBOC,Counter-Cyclical Factor