Yuan weakening a correction to market rate

The recent adjustment to the yuan exchange rate formation mechanism is more a measure to correct the currency value to market level than a design to boost exports, said the Ministry of Commerce (MOC) on Wednesday.

The discrepancy between the central parity rate and the actual trading rate has been largely narrowed thanks to the reform last Tuesday, which will help the market play an important role in determining the renminbi exchange rate and boost market confidence in yuan, said MOC spokesperson Shen Danyang in a news conference.

The fluctuation of yuan value is a double-edged sword that has various impact on China's foreign trade, Shen said. The weakening of yuan may be relatively beneficial to the labor intensive companies while adding costs to those that rely heavily on imports or those with large amounts of debts valued in foreign currencies.

Shen also suggested financial institutions develop products to hedge against the volatility of yuan exchange rate.

The central parity rate of yuan dipped more than 4.6 percent against the U.S. dollar in the three-day period after the central bank changed its formation mechanism on Aug. 11. It then strengthened mildly this week to stay below the 6.4 level.

The central parity rate is currently released before the opening of the interbank market each trading day, based on a weighted average of prices offered by market makers and referring to the closing price on the previous day. The yuan is allowed to trade on the spot market within 2 percent of the rate.