The People’s Bank of China (PBOC) sets the daily midpoint for the yuan (renminbi) as part of a managed floating exchange rate system. This allows the yuan to move within a range of +/- 2% around the midpoint. When determining this daily midpoint, the PBOC considers market supply and demand, economic indicators, and international currency changes, mainly focusing on the US dollar.

Daily Reference Rate

Every day, the PBOC establishes a reference rate that serves as a benchmark for yuan trading. This trading band allows the yuan to rise or fall by up to 2% from the midpoint during a trading day. The PBOC can adjust this range based on changing economic conditions and policy goals. If the yuan approaches the band limits or experiences high volatility, the PBOC may intervene in the forex market to maintain stability. This could involve buying or selling the yuan to minimize large fluctuations and ensure gradual adjustments. The reference rate and band system help the bank manage the yuan’s value while keeping the economy balanced. Recently, the People’s Bank of China hinted at guiding the yuan weaker, signaling a managed depreciation. This comes after China’s export growth for August 2025 was only 1.2%, which fell short of expectations and indicates a need for a more competitive currency. The central bank is not allowing the yuan to drop sharply but is permitting a steady decline to support the economy. For derivative traders, this controlled pace means that implied volatility in USD/CNY will likely stay low. This environment is good for selling options to gain premium, especially out-of-the-money calls on the pair. The PBOC’s involvement acts as a ceiling, reducing the chances of a sudden sharp increase above the managed range in the near future. The broader situation supports a weaker yuan, given that the US Federal Reserve recently indicated plans to keep interest rates at 5.0% to tackle ongoing inflation. This significant interest rate gap between the US and China still attracts capital flows into the dollar. Thus, the path of least resistance for the USD/CNY pair is upward, even if it is at a slow pace.

Historical Dynamics

We saw a similar situation in 2023 when the USD/CNY pair rose above 7.30. During that time, the PBOC also set strong daily rates to slow the depreciation rather than resist the overall trend. History suggests that the current strategy is more about easing the process, not changing the goal. In the coming weeks, we will closely monitor China’s industrial production and retail sales data for signs of the economy’s health. Any major downside surprises in these figures could lead authorities to guide the yuan even weaker. The daily reference rate will remain the most critical data point, as any significant deviation from estimates could indicate a potential change in policy. Create your live VT Markets account and start trading now.

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