China's central bank said Monday the Chinese currency has the fundamentals to remain stable relative to a basket of currencies after a change on Friday in the way the renminbi's value is calculated.
The fundamentals include a high economic growth rate, a large trade surplus, increasing overseas renminbi (RMB) assets accumulation, strong foreign exchange reserves, and a sound fiscal condition, the People's Bank of China (PBOC) said in a note posted on its official website.
China Foreign Exchange Trade System (CFETS) on Friday released a yuan exchange rate composite index that measures the currency's strength relative to a basket of 13 foreign currencies, including the U.S. dollar, euro and Japanese yen, weighted according to the trade volume with China.
"Compared with just one currency, a basket of currencies can better capture the competitiveness of a country's goods and services and better enable the exchange rate to adjust import, export, and investment activities and the balance of payments position," said the PBOC.
Valuing against a basket of currencies does not mean a peg to the basket, said the PBOC in the note, adding that market demand and supply will also play a key role in formulating the interest rate.
The PBOC suggested that the market should view the RMB's strength relative to a basket of currencies rather than just the U.S. dollar, according to a CICC Macro team report released on Monday.
But the RMB's bilateral exchange rate against the USD will continue to be the most closely watched indicator, the CICC report said.
Since the PBOC adopted the managed floating regime in 2005, it has been policy to manage the RMB against a basket. The yuan exchange rate has largely followed this regime, supplemented by necessary management in times of financial crisis or other special circumstances, the central bank said, though it did not provide further details.
In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices set by market players before the opening of the interbank market each business day.
The yuan weakened by 137 basis points to 6.4495 against the USD Monday, its lowest level since July 2011, according to the CFETS. The correction came after the Chinese currency had appreciated 2.93 percent against the USD as of late November, compared with the end of 2014.
