Policy Tools of the PBOC

The People’s Bank of China (PBOC) uses various tools to manage the economy. These include the Reverse Repo Rate, Medium-term Lending Facility, Reserve Requirement Ratio, and Loan Prime Rate (LPR). When the LPR changes, it affects loan and mortgage rates, as well as interest on savings. This also influences the exchange rates of the Chinese Renminbi. China has 19 private banks, with notable ones like WeBank and MYbank that are supported by large tech companies. These banks began operating in a sector traditionally dominated by the state in 2014, contributing a small portion to the overall financial system. These changes are part of ongoing financial reforms and market evolution in China. The PBOC has set the USD/CNY exchange rate at 7.0764, indicating a slight weakening of the yuan. This is a key sign that the authorities might be working to prevent the currency from getting too strong. It’s important to view this as a conscious effort to manage the exchange rate rather than just a random market movement. This action is notable because recent data shows that China’s exports rose by 8.5% year-over-year in November 2025, exceeding expectations. A stronger yuan could make Chinese products more expensive, potentially slowing down this vital growth area. The central bank seems to be intervening gently to maintain this positive export trend as the new year approaches.

Key Economic Indicators

On the other hand, the US Federal Reserve is signaling a different direction. Fed funds futures indicate a 92% chance of a rate cut in their upcoming meeting. This significant difference in policy—a dovish Fed versus a stability-focused PBOC—creates tension in the markets. The US dollar is expected to weaken, while the yuan may not appreciate as much as other currencies. For derivatives traders, this scenario suggests that implied volatility on USD/CNH options is too low. With one-month volatility around 4.5%, it appears to underestimate the risk of sharper movements, especially considering spikes above 8% during policy uncertainties in 2023. Traders should consider buying straddles or strangles to prepare for potential market breakouts in the coming weeks. Another strategy is to focus on cross-currency pairs that are not directly influenced by the PBOC. Given the weak outlook for the US dollar, going long on pairs like AUD/CNH or EUR/CNH could be more effective. This strategy takes advantage of both the expected US dollar decline and the PBOC’s attempts to limit the yuan’s appreciation against it. Create your live VT Markets account and start trading now.

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