On Monday, the People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0973. This is slightly up from 7.0949, but lower than the 7.1318 forecast by Reuters. The PBOC aims to keep prices stable, support economic growth, and carry out financial reforms. It belongs to the People’s Republic of China and operates under the influence of the Chinese Communist Party. Currently, Pan Gongsheng is in charge.

PBOC Policy Tools

The PBOC uses various tools to achieve its goals. These include the seven-day Reverse Repo Rate, Medium-term Lending Facility, and the Reserve Requirement Ratio. The Loan Prime Rate serves as the main benchmark for loans and mortgages. Changes to this rate can also affect the Renminbi exchange rate. China has private banks, but they are a small part of the overall financial system. Notable ones include digital banks like WeBank and MYbank, backed by Tencent and Ant Group. Private banks were allowed to operate starting in 2014, marking a shift away from a state-dominated sector. The PBOC has permitted a slight weakening of the yuan against the dollar with its latest reference rate. However, by fixing the rate much stronger than market expectations, the central bank is signaling that it won’t allow a quick depreciation. This suggests a controlled approach to easing the currency to support the economy. This move appears to respond to recent economic data. The GDP growth for Q3 2025 was only 4.2%, missing estimates. Moreover, exports dropped for the second month in a row, putting pressure on the government to boost trade competitiveness. A managed depreciation of the yuan is one strategy to help with these challenges.

Implications For Traders

For traders in derivatives, this policy indicates that the yuan may trend downward, but its decline will be tightly managed. This should lead to lower realized volatility for USD/CNY options compared to what economic pressures might suggest. Selling short-dated call options on USD/CNY could be a good strategy to profit from this reduced volatility. This strategy aligns with what we saw in 2023 and 2024 when the PBOC frequently resisted speculative pressure. At that time, the central bank used strong daily fixings and state bank actions to slow the yuan’s decline past the 7.30 mark. We expect similar interventions if the currency approaches key psychological levels in the near future. The significant difference in interest rates, with US rates likely remaining high, continues to favor long USD/CNY positions. The PBOC’s strategy to manage the yuan’s slide actually makes this carry trade more appealing by lowering the risk of a rapid currency correction. Traders may want to use forward contracts to secure this favorable yield difference. Create your live VT Markets account and start trading now.

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