The People’s Bank of China (PBOC) set the USD/CNY reference rate at 6.9929 on Friday, down from 7.0019 the day before. This change differs from the Reuters estimate of 6.9481. The PBOC aims to keep prices stable, manage exchange rates, and promote economic growth. It is a state-owned entity of the People’s Republic of China, influenced by the Chinese Communist Party Committee Secretary.

Monetary Policy Tools in China

The PBOC uses various monetary policy tools that are not common in Western countries. These include: – A seven-day Reverse Repo Rate – A Medium-term Lending Facility – Foreign exchange interventions – The Reserve Requirement Ratio The Loan Prime Rate also impacts market loan rates, mortgage rates, and savings interest. Nineteen private banks operate within China’s mainly state-controlled financial system. Notable private banks like WeBank and MYbank are backed by tech companies such as Tencent and Ant Group. In 2014, the government allowed domestic lenders fully funded by private entities, increasing private investment in the sector. The People’s Bank of China has now set the reference rate at 6.9929, making the yuan stronger than the 7.00 level for the first time this year. This demonstrates authorities’ growing confidence in the economy. However, the rate is weaker than market expectations, indicating that a rapid rise in the yuan’s value won’t be allowed. This suggests a managed strength policy for traders. In December 2025, China’s export growth surprisingly turned positive, rising 2.3% year-over-year. This controlled approach helps prevent the yuan from strengthening too quickly, which could harm the fragile recovery. It also hints that implied volatility in USD/CNY options might be overpriced.

Strategies for Traders

Given these circumstances, strategies that thrive on stable price action and lower volatility may be beneficial in the coming weeks. Selling out-of-the-money USD/CNY call options to gather premiums seems appealing since the central bank is currently limiting the yuan’s upside. This is particularly relevant after the volatility seen in mid-2025 when the rate exceeded 7.35. Looking ahead, it’s crucial to closely monitor the central bank’s other policy tools. Following last year’s two cuts to the Reserve Requirement Ratio (RRR) aimed at stimulating growth, the current currency rate fixing indicates a shift towards stability. Further updates on the Medium-term Lending Facility (MLF) rate will be a key indicator of their future plans. The bank is carefully balancing support for the recent boost in economic activity, with Q4 2025 GDP growth recorded at 4.9%. Their goal is to ensure stability to attract foreign investment without compromising the competitiveness of Chinese goods abroad. This implies that the currency is likely to trade within a tight range controlled by policymakers. Create your live VT Markets account and start trading now.

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