China defends "countercyclical" RMB formula

China’s central bank defended its new yuan-fixing formula, saying the added “countercyclical” factor is based on publicly available economic data to more accurately reflect the fundamentals of the Chinese currency. In March, the People’s Bank of China unexpectedly tweaked the formula to calculate the daily reference rate of the currency by adding a “countercyclical” component. Given the lack of detail in the announcement at the time, market participants and analysts raised concerns that the yuan’s daily fixing would become opaque, according to Caixin. On Friday, the central bank said in its second-quarter monetary policy implementation report that the new formula in fact let market forces play a bigger role in fixing the yuan’s exchange rate. It said the “countercyclical factor” is decided by quoting banks, which also take account of the overall economic conditions and their relationship with the country’s currency. The change would smooth out the impact of “irrational” investor sentiment that tends to amplify market volatility.