On Friday, the People’s Bank of China (PBOC) set the USD/CNY central rate at 7.0128. This is lower than the previous day’s rate of 7.0197 and also below the Reuters estimate of 6.9832. This action shows the central bank’s efforts to maintain price and exchange rate stability while supporting economic growth. The PBOC is state-owned and influenced by the Chinese Communist Party. Key decisions are made by the Committee Secretary, who is appointed by the Chairman of the State Council. The central bank uses various monetary policy tools that differ from those in Western economies. These tools include a seven-day Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio.

Development of Private Banks in China

China has 19 private banks, with WeBank and MYbank leading the way, supported by Tencent and Ant Group. This growth followed a 2014 policy that allowed fully capitalized domestic lenders to operate in the mainly state-controlled financial system. The PBOC’s decision to set a firmer yuan rate indicates a desire to manage the currency’s strength but not stop it. The fix at 7.0128 is stronger than the previous day but weaker than market estimates. This suggests that officials are cautious about the currency’s rapid appreciation. It shows that the PBOC will remain active in the currency market. This decision follows positive economic data that support the yuan’s strength. China’s GDP for the fourth quarter of 2025 was 4.9%, surpassing expectations. Additionally, December 2025 export data showed a 3.5% increase for the third month in a row. These results encourage a stronger currency, which the PBOC aims to manage to protect its export sector. Throughout late 2025, the PBOC focused on stability to support a delicate economic recovery. The one-year Loan Prime Rate (LPR) remained steady at 3.45% for five months. This approach of keeping internal rates stable while managing the exchange rate is likely to continue.

Implications for Derivative Traders

For derivative traders, this indicates a phase of lower volatility in the USD/CNY pair. The central bank is clearly controlling the currency’s movement, creating a managed float instead of a free market. Strategies like selling option volatility through short strangles on CNH may be appealing, as the PBOC is likely to minimize any sharp changes. This controlled environment is different from the higher volatility seen in parts of 2025, driven by concerns in the property sector. The current steady appreciation suggests that taking aggressive bets on a significantly stronger yuan may be risky. Instead, range-trading strategies could work better in the coming weeks. We will closely monitor the next Medium-term Lending Facility (MLF) rate decision for further insights. Any unexpected changes there could signal a shift in the central bank’s broader policy goals. Until then, the main focus remains on the PBOC’s preference for stability and a gradual strengthening of the yuan. Create your live VT Markets account and start trading now.

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