The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi. This midpoint is based on various currencies, mainly the US dollar, and affects how the yuan is traded each day. The yuan uses a managed floating exchange rate system, allowing it to fluctuate within a set range of +/- 2%.

Setting The Daily Midpoint

Every morning, the PBOC looks at market supply and demand, economic indicators, and changes in the global currency market to decide on the yuan’s midpoint. This reference point guides trading for the day, enabling controlled adjustments to its value. The trading band allows for a maximum increase or decrease of 2% from the midpoint each day, although the PBOC can modify this range based on economic conditions. If the yuan’s value gets close to the band limit or becomes volatile, the PBOC might step in to stabilize it by trading yuan. These actions help ensure a steady and gradual adjustment of the currency. The system is designed to keep the currency stable while allowing for controlled changes in value. Currently, with a reference rate estimate of 7.1845, the yuan is under pressure to depreciate. This rate, though managed, reflects economic challenges and a strong US dollar. Traders should expect the PBOC to continue using the daily fix to slow, but not fully stop, this gradual weakening. Recent economic data supports this cautious approach. In July 2025, China’s industrial production grew only by 3.9%, which was below market expectations and indicates a slowing economy. This weakness puts pressure on the yuan, yet the PBOC has been consistently setting stronger fixes to keep it stable.

Impact Of A Robust US Dollar

Meanwhile, the US dollar remains strong against most major currencies. Recent US inflation data shows that core prices are still stubbornly high, leading many to believe the Federal Reserve will keep interest rates steady into 2026. This difference in interest rates between the US and China will keep attracting capital to the dollar. For traders dealing in derivatives, this suggests that the yuan may weaken, but the PBOC will control the pace closely. Selling short-term volatility on the USD/CNY pair could be a wise strategy, as the PBOC’s 2% trading band is likely to limit any sudden daily changes. The central bank is focused on maintaining stability above all. Looking back to late 2023, when the yuan faced significant money outflows, we saw the PBOC actively manage the exchange rate for several months. This frustrated traders betting on a sharp decline, showing the bank’s readiness to counter market forces for extended periods. We will closely watch the difference between the onshore yuan (CNY) and the more freely traded offshore yuan (CNH). A widening gap could indicate that market pressure is building beyond what the central bank finds comfortable. This might signal a future policy change or an unexpected adjustment in the reference rate. Create your live VT Markets account and start trading now.

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