On Monday, the People’s Bank of China (PBoC) set the USD/CNY central rate at 7.0108, which is slightly lower than the previous rate of 7.0128. This new rate is higher than Reuters’ estimate of 6.9849. The PBoC focuses on three main goals: keeping prices stable, maintaining a stable exchange rate, and promoting economic growth. The bank also aims to implement financial reforms, like developing the financial market.

Ownership and Influence

The People’s Republic of China owns the PBoC, with the Chinese Communist Party exerting significant influence over its operations. Mr. Pan Gongsheng is the current governor and CCP Committee Secretary. To meet its objectives, the PBoC uses various tools, including the seven-day Reverse Repo Rate, Medium-term Lending Facility, and Reserve Requirement Ratio. The Loan Prime Rate (LPR) is China’s benchmark interest rate that affects loans, mortgages, and the exchange rates of the Chinese Renminbi. China allows 19 private banks to operate, including digital lenders WeBank and MYbank, which started in 2014. These private banks make up a small part of China’s financial system and are supported by major tech companies like Tencent and Ant Group. The PBoC’s daily reference rate indicates its intention to maintain a stable or slightly stronger yuan. By setting the USD/CNY rate at 7.0108, it shows that the central bank is actively managing the currency against market expectations. We can expect ongoing interventions to prevent significant drops in the yuan’s value in the coming weeks.

Economic Context and Implications

This approach aligns with the economic data from late last year. In 2025, China’s GDP growth struggled to stay above 5%. The official PMI figures from December showed that factory activity was still contracting. With consumer price inflation at a reported -0.3% year-over-year in the fourth quarter of 2025, a stable currency is vital to avoid capital flight and build confidence. The central bank’s actions counter its own policies aimed at easing, such as the multiple cuts to the reserve requirement ratio in 2025. This is different from the US Federal Reserve, which, after several cuts last year, is now indicating a pause, narrowing the interest rate gap between the two countries. The PBoC is using a wide range of tools to stimulate the domestic economy while managing the currency. For derivative traders, the controlled currency environment suggests that implied volatility for the yuan may stay low. Options strategies that benefit from this low volatility, such as selling short-dated USD/CNH strangles, might be effective. The central bank’s consistent fixing limits the likelihood of large, unexpected fluctuations in the exchange rate. We should closely monitor the 7.00 level as a significant psychological and policy benchmark. Given the PBoC’s current approach, traders can expect the USD/CNY to stay within a relatively narrow range, with the central bank working to protect the yuan from major weaknesses. Any deviation from this pattern in the daily fix would indicate a potential shift in policy direction. Create your live VT Markets account and start trading now.

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