China's central bank plans change to yuan fixing formula, sources say

The potential new system would introduce a "counter-cyclical factor" to China's current system of allowing the yuan to trade within a government-set band, according to a statement on the website of the Foreign Exchange Trade System, an agency under the People's Bank of China.

On Friday, China's authorities announced another change to the formula to fix the yuan exchange rate.

China plans to change the way it calculates the yuan's daily reference rate against the dollar, adding a "counter-cyclical adjustment factor" that may blunt the impact of big market swings, according to people familiar with the matter.

"The counter-cyclical adjustment factor sounds like an increased role for the fixing to be nudged away from where markets would set it", Sean Callow of Westpac Banking Corp was quoted by Bloomberg as saying.

"The authorities' actions give the impression that they are more anxious about yuan stability than declared in their public statements".

China has made yuan stability a priority this year as the authorities try to stem capital outflows and prevent financial shocks before an important leadership reshuffle in the ruling Communist Party at the end of this year.

Banks are now tweaking and testing their models and will soon start providing quotes using the new system, the people said.

State banks stepped in on Thursday to support the currency in what some traders said was a show of strength a day after Moody's downgraded the country's credit rating.

As seen in the yuan's rate against the dollar since April, the deviation between the yuan's closing rate and its central parity rate has been widening, with the closing rate most of the time weaker, said Chen.

"The move is understandable since China has adopted a managed floating exchange rate system", said Liu Dongliang, an analyst at China Merchants Securities.

With the new formula, authorities probably intend to raise stability, particularly during periods when outflow of capital exerts downward pressure on the yuan that the authorities might consider excessive, stated Nordea Bank in a research report.

"The PBoC has been fixing with a major dose of discretion", said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. "The introduction of the "countercyclical factor" will help reduce that deviation". But since last year, the yuan has plummeted to its lowest levels against the dollar in several years as the greenback spiked and Chinese investors and businesses moved huge sums of money offshore.