THE central bank said Friday it was adjusting its methodology for fixing the yuan’s daily midpoint in order to keep the currency market stable, amid broad U.S. dollar strength and ongoing trade tensions between China and the United States.

The yuan surged more than 400 pips to trade at 6.8412 against the U.S. dollar in late night trading after the People’s Bank of China announced the change.

But the currency has still depreciated by about 5 percent since the start of the year, partly reflecting concerns over debt levels in the economy, and gloomier prospects for economic growth and exports due to China’s escalating trade dispute with the United States.

The People’s Bank of China said the “pro-cyclical market sentiment” driving the yuan’s slide had persuaded it to resume use of a “counter-cyclical factor” when it fixes the yuan’s daily midpoint.

“Affected by the recent strong dollar index and trade frictions, there have been some pro-cyclical activities in the foreign exchange market,” the People’s Bank of China said.

The central bank said the revival of the “counter-cyclical factor” would help the yuan to remain basically stable at a reasonable and balanced level.

Analysts say the People’s Bank of China’s aim would be to stop a herd mentality from developing in the currency market, which would run the risk of accelerated capital outflows.

Several analysts suspected it was a precautionary move by the People’s Bank of China to bolster the yuan while the trade row with the United States drags on.

“There was no breakthrough in the Sino-U.S. trade talks, and the negotiations between the two sides are expected to become a protracted war. The central bank has to take out measures step by step to stabilize the exchange rate,” said Ken Cheung, senior Asian foreign exchange strategist at Miuzho Bank in Hong Kong.

“Whether the yuan will start to appreciate is still largely dependent on the progress of the trade war.”

U.S. and Chinese officials ended two days of talks Thursday, with no major breakthrough as their trade frictions escalated with activation of another round of dueling tariffs on US$16 billion worth of each country’s goods.

While no deal had been expected by markets, the focus is now shifting to far more sweeping U.S. tariffs, on another US$200 billion in Chinese goods, which are expected to go into effect in late September. (SD-Agencies)