New Yuan fix stimulates capital flight from China

The new way China fixes its national currency exchange rate actually stimulates capital flight and has already provoked a gradual depreciation of the currency. That’s what reporters have learned from a former member of the central bank's Monetary Policy Committee on Tuesday.

In the Shanghai Securities News Yu Yongding revealed that the new mechanism adopted by the People's Bank of China to set the national currency’s midpoint rate didn’t allow for true two-way volatility in the exchange rate, and had affected foreign exchange reserves.

Preventing the Yuan from hitting market equilibrium appears to be a rejection of increasing the overall cost of capital flight.

Before the changes arose in August, the PBOC set the daily fix by simply asking currency market makers for price quotations. The new mechanism to fix the national currency midpoint is built around the closing price from a day earlier as well as by reference to a basket of currencies.

The Yuan has dropped 6.1% against the greenback so far this year, and kept to an 8-1/2 year minimum on Tuesday. This month it has lost approximately 1.6% against the US dollar. 

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