The People’s Bank of China (PBOC) oversees the daily midpoint for the yuan, also known as the renminbi or RMB. This central bank uses a managed floating exchange rate system, allowing the yuan to move around a central reference rate within a set “band.” Right now, this band is +/- 2%.

The Role of PBOC in Currency Management

Each day, the PBOC sets a midpoint for the yuan against a basket of currencies, with the US dollar being the most important. They consider various factors like market supply and demand, economic data, and changes in international currency markets. This midpoint serves as the benchmark for trading each day. The yuan can vary within 2% above or below this midpoint. This means it can increase or decrease by as much as 2% in one day. If the yuan approaches the limits of this range or shows too much volatility, the PBOC may intervene. This intervention usually involves buying or selling yuan to keep changes gradual and controlled. Currently, the People’s Bank of China is expected to set the USD/CNY reference rate around 7.1793. This follows a trend we’ve seen throughout much of 2025, where the central bank has encouraged a weaker yuan. This likely supports China’s export sector, which experienced only a 1.5% year-over-year growth in the second quarter of 2025, below what analysts had hoped. With the PBOC actively managing the currency, we shouldn’t expect wild fluctuations soon. The daily fixing process and the strict +/- 2% trading band help prevent drastic changes, unlike the volatility seen during the trade disputes in 2019. This situation suggests that selling options to gather premiums could be a good strategy, as real volatility has been lower than what was anticipated.

A Controlled Depreciation Framework

A key indicator for us will be the daily difference between market estimates and the official PBOC fix. For the past month, we’ve noticed that the official fix is consistently stronger than market expectations. This shows the PBOC’s intent to avoid a chaotic decline beyond the 7.20 level. While the yuan is allowed to weaken, the pace is monitored closely. This controlled depreciation occurs against a backdrop of significant interest rate differences between China and the United States. This gap has remained steady since the US Federal Reserve paused its rate hikes in late 2024. As a result, there is natural downward pressure on the yuan, with the PBOC favoring a managed decline instead of trying to reverse it. We expect that this situation will limit any major strengthening of the yuan until there’s a clear change in US monetary policy or a major stimulus announcement from Beijing. Create your live VT Markets account and start trading now.

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