The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, or renminbi (RMB), using a managed floating exchange rate system. This system allows the yuan’s value to change by up to 2% above or below a central reference rate.

How the Yuan’s Midpoint is Determined

Each morning, the PBOC calculates the yuan’s midpoint against various currencies, mainly the US dollar. To find this midpoint, the bank looks at market supply and demand, economic indicators, and trends in international currencies. The PBOC lets the yuan move within a 2% range from this midpoint. This means the currency can rise or fall by up to 2% in a single trading day. If the yuan approaches the limits of this range or becomes too volatile, the PBOC may step in by buying or selling yuan. This helps keep the currency valuation stable and makes adjustments smooth. In other news, China is expected to keep its lending rates unchanged for the fifth month in a row, even after the US Federal Reserve recently cut its rates. The People’s Bank of China has maintained its lending rates for four straight months, showing a clear difference in policy compared to the West. This comes shortly after the US Federal Reserve cut its benchmark rate in early September 2025 due to slowing inflation and a softening job market. This growing gap in interest rate policies is a key factor for the yuan in the upcoming weeks.

Reactions in the Bond Market

The widening interest rate difference for the yuan is already evident in the bond markets. The yield gap between Chinese 10-year government bonds and U.S. 10-year Treasuries has decreased to its smallest level in over two years, making yuan-denominated assets more appealing. Earlier this year, the spread was over 120 basis points, but now it’s below 50 basis points, providing essential support for the yuan. For derivative traders, this situation suggests that the implied volatility on the USD/CNY pair might be overestimated. The PBOC’s strong influence on the currency, shown by today’s firm reference rate, indicates that the yuan is likely to appreciate gradually, rather than experience sudden, unpredictable changes. Selling out-of-the-money options to gain premiums could be a good strategy, as we expect the pair to stay within a stable range. The most likely direction for the USD/CNY seems to be downwards. The combination of a cautious Federal Reserve and a stable PBOC should keep pressure on the pair. We saw the opposite happen during the 2022-2023 period when aggressive Fed rate hikes and Chinese easing led to a sharp rise in the USD/CNY rate. It’s essential to closely monitor the daily reference rate settings for any shifts in the central bank’s stance. The main risk is that Chinese export data for September, expected in a few weeks, may be weaker than anticipated. This could prompt the PBOC to lower the yuan to support its economy. For now, the plan is to position for a stronger yuan while keeping an eye on the +/- 2% daily trading band as the key limit for price movement. Create your live VT Markets account and start trading now.

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