PBOC’s Yuan Support Through Fixing Causes Headache for Companies

(Bloomberg) — China’s central bank has used an artificially strong reference exchange rate to defend a weak currency this year. This intervention has inflicted unintended pain on some.

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For years, Chinese companies have been basing their foreign exchange accounting on the People’s Bank of China’s daily yuan fixing, rather than the prevailing market rate, as recommended by the country’s Ministry of Finance. But as the PBOC has set the fixing consistently stronger than the spot level since June, the gap would make dollar assets appear lower in value in yuan terms on a corporate balance sheet, resulting in a paper loss.

In one example, Shanghai-listed Whirlpool China Co. said it incurred an unrealized loss of 31.4 million yuan ($4.4 million) on foreign exchange-related assets and hedging between January and September. If the calculation were based on the much weaker spot rate, the loss would narrow to 3.1 million yuan, the company said in a filing.

Whirlpool China didn’t immediately respond to an emailed request for comment. Calls to the company’s finance department went unanswered.

The problem faced by companies like Whirlpool China is another reminder of the distortion that the country’s tightly managed currency regime can create and the ensuing consequences. It also has prompted some local businesses to consider using the yuan’s spot rate for accounting purposes, moving away from its less market-driven counterpart.

“Many Chinese corporates use the USD-CNY reference rate in their annual financial reports to calculate FX gains/losses for the year, and this practice may thus prompt the PBOC to narrow the basis for macro-prudential reasons,” HSBC Holdings Plc analysts led by Paul Mackel wrote in a note. “Currently, the basis between USD-CNY spot and fixing remains too wide compared to previous years.”

In a bid to prop up a currency that has lost over 3% against the greenback this year, the PBOC has kept the fixing an average 398 pips stronger than the spot rate so far in 2023, data compiled by Bloomberg show. That’s much wider than the 120 pips recorded in 2022 and 17 pips in 2021. And since late June, the reference rate has been stronger than market estimates on a daily basis.

Since 2007, China’s finance ministry has recommended that companies use the fixing when converting the value of foreign-currency assets from cash to investment holdings and receivables into yuan.

The consistently stronger fixing has pushed some Chinese firms to consider abandoning the longstanding practice.

The board and audit committee of a large listed exporter based in the southern Guangdong province recently approved a plan to start using the spot rate for currency conversion, according to the company’s finance officer who requested anonymity discussing private matters.

To some observers, while the use of the reference rate has caused headaches for such Chinese firms, it’s unlikely to affect the way the PBOC manages the currency.

“The PBOC will try to reduce its fixing support if available and restore to normal market mechanism, but the gap has very limited impact on the PBOC action toward the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank, adding that it may not concern policymakers much especially as the fixing gap has narrowed lately.

The differential between the reference and spot rates stood at about 300 pips Friday, down from a September high of over 1,400 pips.

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