China is set to reduce dollar’s influence on Yuan trading basket

The dollar’s influence on how China sets its yuan exchange rate is expected to decrease again this year.

A branch of China’s central bank factors in the moves of a basket of trading partners’ currencies when setting the yuan’s daily reference rate. The weighting of each of the 24 components in the CFETS RMB Index is adjusted based on the proportion each nation took in total trade with China the previous year.

The greenback’s share is currently the highest in the basket, at slightly more than a fifth. But it has been declining since 2015. Last year, the U.S. accounted for 17.8% of China’s two-way shipments with the 24 peers last year, down from 20.5% in 2018, according to data compiled by Bloomberg. China is expected to adjust the basket by the end of the year.

China started setting the yuan against the basket of trading partners’ currencies in 2015. The dollar’s weighting was reduced to 21.59% in last year’s adjustment versus 22.4%. As the greenback fades, the euro has been climbing: it accounts for 17.4% of the currency basket, up from 16.34% four years ago.