China CFETS introduces RMB Index; Yuan to currency basket

New index, basket of currencies

China Foreign Exchange Trade System (CFETS) introduced its RMB Index on Friday 11 December 2015. According to the agency,

The publication of CFETS exchange rate index provides quantitative indicators for market participants to observe the RMB exchange rate movements, and offers a more comprehensive and accurate way to assess market conditions.

In other words, please do not focus too much on value of RMB to the Dollar. Please look at RMB against other currencies as well.

 

13 constituents, currencies of major trade partners

  1. US Dollar has the largest weighting with 26.4 percent
  2. Euro 21.4 percent
  3. Yen 14.7 percent
  4. Others are currencies of Hong Kong, the U.K., Australia, New Zealand, Singapore, Switzerland, Canada, Malaysia, Russia and Thailand
CFETS RMB Index constituents

CFETS RMB Index constituents | Source: Bloomberg

 

Following closely RMB inclusion into SDR basket, these are moves towards full RMB internationalisation.

 

From People’s Bank of China,

Dec 11th, 2015

The China Foreign Exchange Trade System (also known as CFETS) has published CFETS exchange rate index on its website on December 11th. This will help bring about a shift in how the public and the market observe RMB exchange rate movements.

For quite long, market participants have used bilateral exchange rate of RMB against USD to assess RMB exchange rate movements. However, as fluctuations of exchange rate serve to adjust trade and investment activities with multiple trading partners, the bilateral RMB-USD exchange rate is not considered a good indicator of the international parity of tradable goods. Therefore, it is more desirable to refer to both the bilateral RMB-USD exchange rate and exchange rate based on a basket of currencies. The effective exchange rate index, on a weighted average basis, describes the relative strength of a country’s currency against a basket of foreign currencies, and reflects the overall value change of that currency. Compared with referring only to 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, investment activities and the balance of payments position. The publication of CFETS exchange rate index provides quantitative indicators for market participants to observe the RMB exchange rate movements, and offers a more comprehensive and accurate way to assess market conditions.

Looking at international experiences, the Federal Reserve, the European Central Bank and the Bank of England all publish   their own exchange rate indices, while intermediate  institutions also publishes their indices. For example, the U.S. Dollar Index released by the Intercontinental Exchange (ICE) has become a major index in the international market. Therefore, it is consistent with international practice that CFETS publishes its RMB exchange rate index. Since the beginning of 2015, the trend of this index has been relatively stable. The index is 102.93 on November 30th, appreciated 2.93% from the end of 2014. This shows that, even though RMB has depreciated against USD since the beginning of this year, it has appreciated modestly against a basket of currencies. Therefore, RMB is relatively a strong currency among the major international currencies.

The CFETS will regularly publish the RMB exchange rate index. This will help guide market participants to shift their focus from the bilateral RMB/USD exchange rate to the effective exchange rate, which is based on a basket of currencies, in their efforts to observe exchange rate movements. This will contribute to maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level.

In order to provide more reference points, CFETS will also publish RMB exchange rate indices based on the SDR currency basket and the BIS currency basket respectively. By the end of November 2015, the above two indices had appreciated 3.50% and 1.56% respectively since the end of 2014.

 

China Foreign Exchange Trade System (CFETS)

The CFETS, founded on April 18, 1994, is a sub-institution of the PBC. Its main functions include: providing systems for FX trading, RMB lending, bond trading, and exchange rate and interest rate derivatives trading; organizing FX trading, RMB lending, bond trading, and exchange rate and interest rate derivatives trading; providing clearing, information, risk management, and surveillance services on interbank markets; and engaging in other businesses authorized by the PBC.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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