China is preparing to restore the mechanism of fixing the yuan exchange rate

China's monetary authorities are appealing to local banks to restore the yuan fixing tool they abandoned two years ago as they seek to manage and protect the rapidly weakening currency.

A source who is aware of the process of setting the yuan exchange rate said that the monetary authorities were pushing banks to include the so-called countercyclical factor in their daily fixations of a tightly regulated rate of exchange.

This is an adjustment that 14 banks make to their yuan quotes, which the People's Bank of China (PBOC) uses to set the daily reference rate. It was abandoned in 2020, when the yuan rose sharply, and the authorities decided to let market forces dictate the course around which the yuan can move.

The source said that on Tuesday, some banks making fixing quotes were asked to start including the countercyclical factor, or X-factor, as it is called locally, and that this adjustment may occur in the coming days.

The 14 participating banks are key participants in China's Foreign Exchange Market Self-Regulation Mechanism, which serves as a mechanism for self-regulation and market coordination.

According to the source, this step is aimed at restoring and strengthening the bilateral floating character of the yuan.

It follows other steps that the authorities have taken to set a floor for the yuan, which has fallen by more than 11% compared to the US dollar, which has risen this year against most world currencies due to rising US interest rates.

This month, the NBK also introduced policy measures, increasing the cost of short-sale currency by reducing the amount of foreign exchange financial institutions that should be held as reserves and restoring risk reserve requirements for currencies purchased through forwards.

The country introduced the countercyclical factor for the first time in 2017, which, according to regulators, was an attempt to link market demand and supply, reduce the possible "herd effect" in the market and do everything possible for market participants to pay more attention to macroeconomic fundamentals.