China to peg RMB to currency index, no longer just the US dollar

World Today

A Chinese yuan currency sign with two arrows is pictured outside a bank branch in Shanghai on August 13, 2015. AFP PHOTO / JOHANNES EISELE

China launched a new method to measure its currency’s exchange rate. The new trade-weighted renminbi, or the yuan, exchange rate index will measure its value against a basket of 13 different currencies.

The idea is that the index will allow global currency watchers to measure the RMB exchange rate more accurately, according to China Foreign Exchange Trade System.

“The mechanism could comprehensively reflect the value change of a country’s currency,” according to an online statement on the official foreign exchange market, which was also published on the central bank’s website. “It has great meaning facilitating the market to observe the change of the RMB’s effective exchange rate from different perspectives.”

The change takes away the previous focus on just the bilateral USD/RMB exchange rate. It is ‘more desirable to refer both to the bilrateral RMB-USD exchange rate and an exchange rate based on a basket of currencies’ said the CFETS.

The CFETS said they will regularly publish the RMB exchange rate index and states that the index has appreciated 2.93 percent since the end of 2014.

The CFETS index provides a quantitative measure. It includes 13 currencies on a weighted index, but the U.S. dollar will still be the largest currency in the basket at 26.4 percent. The euro is second at just over 21 percent.

The weights are based on China’s trade with those economies and are adjusted for re-exports, according to the CICC Macro team’s report on the RMB released on Monday.

Previously, investors tracked the yuan’s fluctuations against the US dollar, but observing the bilateral RMB-USD exchange rate will not reflect international parity of traded goods by multiple countries.

On Monday, the central parity rate of the yuan weakened for the sixth consecutive day to its lowest level against the U.S. dollar since July 2011. The announcement comes ahead of a heavily expected interest rates increase by the Federal Reserve in America which is likely to affect currencies across the world.