The People’s Bank of China (PBOC) will adjust the formula for calculating its daily yuan reference rate to ward off potential capital outflows resulting from the United States Federal Reserve’s impending rise in interest rates. A “counter-cyclical adjustment factor” would be added to the closing exchange rate and to the basket of currencies for calculating the yuan’s daily fixing, or the mid-point rate from which the yuan is allowed to trade by up to 2%. The change would mean a stronger state hand and less of a role for market forces in setting the rate. But a “countercyclical” factor in the pricing model could help offset the “herd effect” and bring the yuan’s central parity in line with economic fundamentals, the PBOC said. Balding, Associate Professor at Peking University’s HSBC Business School in Shenzhen, questioned the need for the change given the yuan’s extremely low volatility in recent months. “The only logical explanation for the change is that they are trying to provide greater discretion in managing the yuan’s value,” Balding said. He added that the new factor would reduce the yuan’s transparency.

China defended its yuan exchange-rate policy and its interventions in the foreign exchange market, saying it hasn’t manipulated its currency but instead sacrificed some of China’s interests to help the world, including the U.S. The yuan comments were part of a 117-page report on Sino-U.S. trade relations published by the Ministry of Commerce (MOFCOM), and are a response to allegations that China is deliberately manipulating its exchange rate to help its exporters. Allegations from Washington about Chinese currency manipulation were “neither objective nor fair”, the Ministry added. Beijing has made great efforts to stave off a fast yuan depreciation, depleting its foreign exchange reserves by nearly USD1 trillion since June 2014, or a quarter of the total.