A new tweak to the mechanism of setting the yuan’s exchange rate gives China’s central bank more power to counter market sentiments betting against the currency, analysts said. The adjustment, announced yesterday by the currency trading arm of the People’s Bank of China, adds a “countercyclical” component to the system of calculating the daily fixing of the yuan’s exchange rate, Caixin reports. The change would help smooth out the impact of investor sentiment that tends to amplify market ups and downs, thus alleviating the so-called “herd effect” that may exist in the foreign currency market, the China Foreign Exchange Trade System said in the announcement. The new adjustment would give it more room for maneuvers in trying to keep the yuan’s exchange rate from big fluctuations, said Xiao Lishen, senior research fellow at the Chinese Academy of Social Sciences. The flip side, however, is that it goes against the government’s goal of making the exchange rate mechanism more market-oriented.
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