China's central bank set a firmer daily anchor for the yuan on Friday, fixing the USD/CNY reference rate at 6.7989 for the session ahead. That was a shade stronger for the Chinese currency than the previous day's 6.8036 fix, and it also came in above the market estimate of 6.7931. On the surface it looks like a small technical number, but this daily fixing is one of the most closely watched signals to come out of Beijing, because it sets the boundaries within which the yuan is allowed to trade for the rest of the day.
Why the daily fixing matters
To read the fixing correctly, keep one thing in mind, the lower the USD/CNY figure, the stronger the yuan and the weaker the dollar. Every morning the central bank sets this level, and the currency is then allowed to move within a fixed band around it. That is why markets look past the number itself to the intent behind it. This time the fix landed stronger than the market had expected, a move that is often read as a signal that the authorities want to keep the currency supported.
What the People's Bank of China is trying to do
The biggest goals of China's central bank are to safeguard price stability, and that explicitly includes keeping the exchange rate stable, while also promoting economic growth. Beyond that, the bank is tasked with pushing financial reforms, such as opening up and developing the country's financial market. In other words, it is far more than an interest rate manager. It is the institution steering the direction of China's entire financial system.
Who really runs China's central bank
Unlike central banks in the West, the PBoC is fully owned by the state of the People's Republic of China, which means it is not treated as an autonomous institution. What is striking is that the biggest influence over its management and direction comes not from the governor but from the Chinese Communist Party's Committee Secretary, a post filled through nomination by the Chairman of the State Council. For now, though, one man, Pan Gongsheng, holds both of these positions, concentrating the levers of control in a single pair of hands.
The toolkit Beijing uses
Compared with Western economies, the PBoC reaches for a much broader set of monetary policy instruments to hit its targets. Its main tools include a seven-day Reverse Repo Rate, the Medium-term Lending Facility (MLF), direct interventions in the foreign exchange market and the Reserve Requirement Ratio (RRR). Sitting above all of these, the Loan Prime Rate (LPR) serves as China's benchmark interest rate. Any change to the LPR feeds straight through to the rates people pay on loans and mortgages in the market, as well as the interest they earn on savings. By moving the LPR up or down, the central bank can also shape the exchange rates of the Chinese renminbi.
A narrow door for private banks
Private lenders occupy only a sliver of China's financial system. The country has just 19 private banks, a small fraction of the whole. The largest among them are the digital lenders WeBank and MYbank, which are backed by the tech giants Tencent and Ant Group respectively. The opening came in 2014, when China first allowed domestic lenders funded entirely by private capital to operate inside a financial sector long dominated by the state, and that was the turning point that let these banks emerge.
How the rest of the market looked
Elsewhere in currencies, the GBP/USD pair gathered strength on Friday to trade around 1.3430 during Asian hours. The British Pound edged higher against the US Dollar on the back of a leadership transition in the UK government and growing expectations of further interest rate hikes from the Bank of England. The EUR/USD pair, meanwhile, posted modest gains around 1.1430 in the early Asian session, helped by a softer US Dollar. The European Central Bank is still grappling with elevated core inflation, which is pushing traders to price in more aggressive tightening even as officials send out mixed guidance.
Gold, for its part, could not build on the previous day's advance, yet it held above $4,100 during the Asian session as traders waited for the next twist in the US-Iran story. A fresh escalation of tensions between the two brought the geopolitical risk premium back to the surface, which supports the safe-haven US Dollar and acts as a headwind for the metal. That said, less hawkish FOMC Minutes kept dollar bulls on the defensive, helping to limit the downside for the non-yielding yellow metal.
Central banks turn quiet
For years, central banks have made a habit of telling markets what might be coming next. Now traders face the prospect that they will say a good deal less. From the Federal Reserve to the European Central Bank and the Bank of England, policymakers are pushing back against forward guidance, which means the old practice of signalling the road ahead is fading, leaving markets to work out more of the picture on their own.
