China raised the central parity rate of the yuan by 341 basis points to 6.3154 against the US dollar on Monday (2 November), the largest amount by far on a single day in a decade. The move comes at a time when the country is seeking to promote the yuan as a global reserve currency alongside the dollar, euro and pound at the International Monetary Fund's (IMF) Special Drawing Rights review this month.
The yuan had jumped excessively on Friday by 0.62% even as data showed that manufacturing is still in decline. This prompted the People's Bank Of China (PBOC) to boost yuan's reference rate. PBOC, which now allows the currency to trade up or down 2% from the centrally set daily rate, announced adjustment to the yuan's mid-rate upwards by 0.54%, an increase that was the largest since 2005 according to Bloomberg.
"Such a big gain is certainly very eye-catching, but the real question is, if the private sector isn't suddenly scrambling to buy Yuan, why is the currency rising at the same time when the interest rates and the reserve ratio are being cut to support the economy? The only guess we can come up with is the IMF decision this month as a stronger currency is somehow seen as supportive of the application for an inclusion," said Sean Callow, senior Forex strategist at Westpac to South China Morning Post. The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.
The move also comes just three months after a surprise devaluation of the yuan sent damaging ripple effects through global markets. PBOC had moved the yuan almost 5% lower in a single week in August. Although it cited the move as part of broader reforms aimed at shifting towards a more flexible exchange rate, global fears sprang up on concerns that Beijing was trying to make its exports cheaper to give it a boost. Moreover, the Chinese economy was performing worse than had been acknowledged after the move.
To make the currency more lucrative, China had also said it will consider a trial programme allowing individuals in the Shanghai free trade zone to directly buy overseas assets and is also looking at opening up yuan-denominated bonds to trading by foreign companies. The central bank will probably continue to intervene in the foreign-exchange market this week to prop up the yuan, making the impact of economic data such as PMIs a less significant factor in moving the currency.
On Monday's trading the yuan weakened to 6.32 against the dollar as of 12.57pm in Shanghai as banks and clients sold the currency after it made a hefty gain on Friday. In Hong Kong's offshore market, where the currency is freely traded, the exchange rate fell 0.33% after strengthening 1.2% last week.