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China changes CFETS currency basket for calculating yuan index: operator

© Reuters. A 100 Yuan note is seen in this illustration picture in Beijing

SHANGHAI (Reuters) – China will change the way it calculates a key yuan index in the new year, nearly doubling the number of foreign currencies in a basket that is used to set the yuan’s value, its foreign exchange market operator said on Thursday.

The central bank, which oversees the market operator, has been trying to reform the way it manages the yuan by making it more market-driven and transparent.

Starting on Jan. 1, the number of currencies in the CFETS currency basket will be increased to 24 from 13, the China Foreign Exchange Trade System (CFETS) said in a statement on its website.

The change is aimed at improving the mechanism to generate and publish the CFETS Index <.cfscnyi>, and make the CFETS currency basket more representative, it said.

China has been promoting the use of the CFETS RMB Index, partly to divert attention from the yuan’s value against the U.S. dollar. The yuan has depreciated almost 7 percent against the dollar this year, and is near its lowest level in 8-1/2 years.

The CFETS RMB index, a trade-weighted exchange rate index that was unveiled in December 2015, fell 5.8 percent between the end of 2015 and Dec. 23 of this year.

The yuan index has been steady since early October, while the currency has been losing ground versus a broadly strengthening dollar.

Analysts said the change was in line with the central bank’s bid to discourage investors from exclusively tracking the yuan’s fluctuations, but it would have limited impact on the yuan.

It also suggested that the central bank was keen to keep the yuan stable on a trade-weighted basis, one analyst said.

The 11 currencies to be added, including the Korean won, the South African rand and the Mexican peso, will have a 21.09 percent weighting in the currency basket, which the CFETS said would basically cover the currencies of China’s major trading partners.

The dollar’s weight in the basket will be reduced to 0.224 percent from 0.264 percent, while the euro’s weight will be cut to 0.1634 percent from 0.2139 percent, the CFETS said in its statement.

It said it would adjust the composition and weighting of its currency basket on an annual basis.

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