On Wednesday, the People’s Bank of China (PBoC) set the USD/CNY central rate at 6.9755. This is lower than Tuesday’s rate of 6.9858 and below the Reuters estimate of 6.9231. This move is part of the PBoC’s goal to keep prices stable, including exchange rates, while also promoting economic growth. The PBoC, owned by the People’s Republic of China, is run by the Chinese Communist Party Committee Secretary, not just the governor. Mr. Pan Gongsheng currently holds both roles. The central bank uses various monetary policy tools, such as the seven-day Reverse Repo Rate, the Medium-term Lending Facility, and the Reserve Requirement Ratio, with the Loan Prime Rate serving as the main interest rate.

China’s Banking Sector

China’s financial sector has 19 private banks, which make up a small part of the system. Well-known digital banks like WeBank and MYbank became key players after 2014 reforms allowed domestic lenders with private funding to enter the mostly state-controlled market. The PBoC set a reference rate that is stronger than the day before, but still weaker than market expectations. This likely aims to stabilize the yuan without allowing it to rise too quickly. Traders should see this as a sign of managed stability rather than a major policy change. China’s GDP growth for Q4 2025 was a bit lower than expected at 4.9%. The latest Caixin Manufacturing PMI for December 2025 was just above the 50.1 mark, indicating minimal expansion. A significantly stronger yuan could hurt the already weak export sector, which the central bank wants to protect. Thus, betting on the yuan becoming much stronger in the coming weeks seems risky. This trend of a strong but not *too* strong fix recalls times in 2023 when the PBoC defended the currency amid mixed economic data. For derivative traders, this suggests strategies that profit from low volatility in the USD/CNH pair, as the central bank is expected to keep it within a narrow range. Options strategies such as selling straddles or iron condors might take advantage of this anticipated stability.

Monetary Policy Tools

The PBoC has many tools, like the Reserve Requirement Ratio and Medium-term Lending Facility, to manage liquidity and promote growth. We don’t expect aggressive cuts to the Loan Prime Rate right now, as this could put more pressure on the currency. Instead, traders should look for targeted liquidity injections as the main form of support. Create your live VT Markets account and start trading now.

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