The People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0656 on Monday, slightly up from Friday’s rate of 7.0638. As China’s central bank, the PBOC’s goals include maintaining price stability, promoting economic growth, and pursuing financial reforms. The PBOC is state-owned and influenced by the Chinese Communist Party. The State Council chairman nominates the committee secretary, who plays a significant role in guiding the bank. Currently, Mr. Pan Gongsheng holds these key positions at the PBOC.

PBOC Policy Tools

To meet its goals, the PBOC uses several policy tools, including the Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio. The Loan Prime Rate (LPR) serves as China’s benchmark interest rate, affecting loan and mortgage rates, savings interest, and the Renminbi exchange rate. China allows private banks to operate, with 19 currently in the sector, including digital lenders WeBank and MYbank, which are backed by Tencent and Ant Group. In 2014, China permitted domestic lenders funded by private capital to join its mainly state-run financial system. The recent weaker yuan fixing at 7.0656 suggests a subtle but important signal from the PBOC. This indicates an official acceptance of a gradual depreciation of the currency. The move likely responds to recent economic data showing a slowdown. This policy makes sense in light of disappointing export data from November 2025, which reported only a 1.2% year-over-year increase, falling short of market expectations. A weaker yuan can help make Chinese goods more affordable for international buyers, boosting the manufacturing sector as the new year approaches. This is a classic strategy the PBOC uses to support economic growth.

Market Implications

Conversely, the recent strength of the US dollar plays a role, fueled by unexpectedly strong US retail sales figures from November, which rose by 0.8%. This raises speculation that the US Federal Reserve may be slower to cut interest rates in 2026, allowing the PBOC some leeway to guide the yuan lower without appearing to devalue it significantly. This situation recalls the economic sluggishness of 2023 during the post-pandemic recovery. At that time, Chinese authorities also used monetary easing and managed currency depreciation to support the economy. We are witnessing a similar approach now, especially following a 25 basis point cut to the Reserve Requirement Ratio in late November. For derivative traders, this hints that implied volatility on the yuan may increase in the coming weeks. Buying CNH put options, which benefit from further weakening of the yuan, could be a smart strategy to hedge against or speculate on this trend. Currently, these options do not reflect a sharp move, offering an attractive risk-reward profile. Given this easing bias, traders should also consider forward contracts. They might prepare for a higher USD/CNY rate in the first quarter of 2026, targeting levels above 7.10. The combination of weak domestic data and a strong dollar suggests a clear path for continued managed depreciation. Create your live VT Markets account and start trading now.

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