The People’s Bank of China (PBOC) manages the daily midpoint of the yuan, also known as the renminbi (RMB), using a managed floating exchange rate system. This system allows the yuan to fluctuate within a specific range, known as a “band,” around a central reference rate. Currently, this band is set at +/- 2%.
Daily Midpoint Determination
Each morning, the PBOC establishes a midpoint rate for the yuan against a basket of currencies, focusing primarily on the US dollar. Factors such as market supply and demand, economic indicators, and international currency fluctuations influence this setting. The midpoint acts as the reference point for that day’s trading activities.
The PBOC permits the yuan to move within a range of +/- 2% around the established midpoint, which means it can appreciate or depreciate by up to 2% from the midpoint within a single trading day. The PBOC may also adjust this range in response to economic conditions and policy goals. If the currency nears the trading band’s limits or encounters severe volatility, the PBOC might intervene by buying or selling the yuan. This stabilises the yuan’s value, ensuring a controlled adjustment.
The expected USD/CNY reference rate near 7.1081 suggests the central bank is allowing for a gradual, controlled weakening of the yuan. We see this as a deliberate policy to support the economy, rather than a sign of losing control. For traders, this managed pace means that while the direction may be for a weaker yuan, the path will likely be slow and heavily guided.
This policy is understandable when we consider the current economic data as of September 2025. The interest rate differential remains a key factor, with US government bond yields continuing to offer a significant premium over Chinese sovereign debt, encouraging capital outflows from the yuan. This, combined with last month’s sluggish export numbers, provides a strong rationale for authorities to use the exchange rate as a support mechanism.
Economic Implications and Strategy
Given the PBOC’s active management, we should not expect explosive volatility in the coming weeks. The daily midpoint setting and the +/- 2% trading band will likely act as a ceiling on any extreme daily moves, making strategies that capitalize on low volatility attractive. The main focus should be on how aggressively the central bank defends the edges of this band if the market tests its limits.
This situation is reminiscent of the managed depreciation we saw in the mid-2010s, where the currency weakened over time but without daily panic. The primary risk for derivative positions now is not a sudden currency collapse, but an unexpected policy change from the PBOC itself. We will be watching for any deviation in the daily fixing from market expectations, as this would be the clearest signal of a shift in their strategy.
