China recently made several changes to its currency basket, which is used for setting the daily value of the currency. According to China Foreign Exchange Trade System (CFETS), the number of currencies included in the basket was increased to 24, up from the previous 13 currencies.

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The most prominent impact of the changes in the basket is that it will curtail the effect of US dollar on the Yuan index. Higher number of currencies will ensure that any big rise in the dollar is negated by the slide shown by emerging market currencies.

OCBC analysts stated in a note, "However, the new weight also implied a possible more volatile USD/CNY should China continue its basket anchor policy." Market experts have also claimed that more volatile emerging markets are likely to make the connection between USD and CNY more unstable as well.

Barclays analysts quoted, "We estimate that the revised index is currently around 1 percent higher than the existing CFETS index and also has been relatively stable over [the second half of 2016] - but in an even narrower 1.25-point range."

The CFETS said on Thursday that the main aim behind changing the composition of basket is to improve the methodology of generating the CFETS RMB Index. The system also stressed that the changes will make the index and the basket more representative.

The latest changes have resulted in the reduction of nominal weighting of the dollar by 4 percent. The newly introduced currencies include Emirate Dirham, Turkish Lira, South Korean Won, and Saudi Riyal.

China is looking to stabilize the value of its currency.  Yuan hit historic low levels against the US dollar last year. The US dollar is holding steady as the country expects its interest rates to increase. 

TagsChina Foreign Exchange Trade System, yuan, us dollar