China expands key yuan index

MORE TRANSPARENT: CFETS basket to have 24 currencies and US dollar’s weight to drop to 22.4pc

CHINA will change the way it calculates a key yuan index in the new year, nearly doubling the number of foreign currencies in a basket that is used to set the yuan’s value, said its foreign exchange market operator yesterday.

The central bank, which oversees the market operator, has been trying to reform the way it manages the yuan by making it more marketdriven and transparent.

Starting Sunday, the number of currencies in the CFETS basket would be increased to 24 from 13, said the China Foreign Exchange Trade System (CFETS) in a statement on its website.

The change is aimed at improving the mechanism generating the CFETS RMB Index and making the CFETS basket more representative.

China has been promoting use of the index, partly to divert attention from the yuan’s value against the dollar which has fallen almost seven per cent this year and is near its lowest in 8½ years.

The trade-weighted CFETS RMB index, which was unveiled in December last year, fell 5.8 per cent between the end of last year and December 23.

The yuan index has been steady since early October, while the currency has been losing ground versus a broadly strengthening US dollar.

Analysts said the change was in line with the central bank’s bid to discourage investors from exclusively tracking the yuan’s fluctuations, but it would have limited impact on the Chinese currency, which is expected to weaken further against the US dollar next year.

“This means that the central bank will pay more attention to the yuan’s stability against a basket of currencies,” said analysts at CEBM Group.

“If the US dollar strengthens sharply, weakening in the yuan will be inevitable.”

The 11 currencies to be added, including the South Korean won, the South African rand and the Mexican peso, would have a 21.09 per cent weighting in the basket, which CFETS said would basically cover the currencies of China’s major trading partners.

The US dollar’s weight would be reduced to 22.4 per cent from 26.4 per cent and the euro’s to 16.34 per cent from 21.39 per cent, said CFETS.

It said it would adjust the composition and weighting of its currency basket annually. Reuters