China Cuts Dollar Weight In FX Basket In Desperate Attempt To “Project Image Of Yuan Stability”

Thursday, December 29, 2016
By Paul Martin

by Tyler Durden
Dec 29, 2016

With the topic of Yuan’s relentless plunge to all time lows clearly bothering China and threatening to breach the symbolic level of 7 Yuan for the dollar, overnight Beijing decided to do something about it. Only instead of actually implementing much needed, and long overdue economic reforms, banking sector deleveraging or financial liberalization, China once again took the easy way out, when it revised its recently introduced trade-weighted FX currency basket by diluting the role of the dollar and adding another 11 currencies as, in Bloomberg’s words, “officials seek to project an image of stability in the yuan.”

Alas, “projecting an image of stability” for the dollar may be problematic as explained most recently last night in “With China Facing Currency, Liquidity Crises, Ex-PBOC Official Urges Use Of “Nuclear Option.” Even more embarrassing for Beijing is that the Politburo believes it can fool the general public with such cheap dollar-store, no pun intended, gimmicks.

As a reminder, the basket was unveiled in December 2015 as a way of shifting focus away from the yuan’s moves against the dollar in the wake of China’s unexpected August 2015 devaluation. PBOC Deputy Governor Yi Gang said last month the yuan’s depreciation versus the dollar was largely driven by the strength of the greenback and the market should refer to its performance against the basket as the economy maintains stable growth.

Here are the specifics: starting January 1, the weighting of the dollar will fall to 22.4% from 26.4% in the basket, China Foreign Exchange Trade System said in a statement Thursday. Additions include the South Korean won, the South African rand, the United Arab Emirates’ dirham, Saudi Arabia’s riyal, Hungary’s forint, Poland’s zloty and Turkey’s lira.

The Rest…HERE

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