THE yuan’s pricing mechanism is increasingly transparent and its rate against a basket of currencies may alternate between appreciation and depreciation, according to Ma Jun, chief economist of the People’s Bank of China’s research bureau.

    Since the Spring Festival holiday in February, changes in the yuan’s central parity rate against the U.S. dollar have been closely aligned with the fixing mechanism, which is “closing price of the previous day plus daily movement of the yuan/dollar rate for maintaining a stable basket,” Ma said.

    The yuan’s fixing mechanism is “increasingly rule-based and transparent,” said Ma, who doesn’t have a direct policy setting role. Market players, including traders and analysts at major banks, have gained a “clearer understanding” of the mechanism and that has had a positive role in stabilizing market expectations, he said.

    Ma’s remarks follow comments by U.S. Treasury Secretary Jacob J. Lew, who urged China to improve monetary policy communication as it takes on a larger role in the global economy.

    While greater attention is given to the basket in the exchange rate formation, Ma stressed it doesn’t mean the yuan is strictly pegged to a basket. “Any strict peg, whether to a basket or a single currency, would undermine monetary policy independence of the country,” he wrote.

    “Since March, we reinforced our reference to the basket. This has led to a visible decline in the average daily volatility of the yuan to the basket, while the daily volatility of the yuan against the dollar has increased,” he said.

    Ma said multiple factors should be watched as they determine if the yuan strengthens or weakens against the basket over a given time period, including macro economic conditions, market demand-supply, changes in expectations and relative changes in consumer prices in different countries.

    “Recently, the factors we’ve paid attention to include the deleveraging of external debt by Chinese companies, their willingness to ‘go global,’ market expectations of the Fed’s rate hikes, the impact of domestic economic data on expectations and capital outflows in other emerging markets,” he said.

    (SD-Agencies)