The People’s Bank of China (PBOC) is tasked with setting the daily midpoint for the yuan, also known as the renminbi (RMB). The PBOC operates under a managed floating exchange rate system, where the yuan is allowed to fluctuate within a defined “band,” currently set at +/- 2% around a central reference rate.
Each morning, the PBOC establishes a midpoint for the yuan against a currency basket, mainly focusing on the US dollar. This setting considers market dynamics, economic data, and global currency trends. The midpoint acts as a benchmark for daily trading.
The Trading Band And The Yuan
The trading band allows the yuan to move within a 2% range from the midpoint during a trading session, permitting appreciation or depreciation. Adjustments to this range may be made by the PBOC based on economic conditions and policy goals.
Should the yuan reach the limits of the trading band or show excessive volatility, the PBOC may engage in market intervention. This involves buying or selling the yuan to maintain stability, facilitating a controlled and gradual currency value adjustment.
The daily setting of the yuan’s midpoint remains a key event, and we will be watching to see if the actual fix comes in stronger than the 7.1325 estimate. China’s recent economic data, such as the Caixin Manufacturing PMI for August 2025 which came in at a soft 50.2, suggests underlying economic weakness. A stronger-than-expected fix would signal that authorities are still uncomfortable with the pace of yuan depreciation against a robust US dollar.
The +/- 2% trading band around the midpoint provides a well-defined range for daily price action, which tends to suppress short-term volatility. We saw this throughout the summer of 2025, when the spot USD/CNY rate often pushed against the weak end of its band but failed to break it, capping gains. This pattern suggests that strategies selling short-dated volatility, such as iron condors, could be effective if we believe the PBOC will continue its strong management.
Monitoring The Fixing Bias
Over the coming weeks, we must monitor the trend in the fixing bias, which is the difference between the official midpoint and market estimates. Throughout 2025, the People’s Bank of China has consistently set the reference rate stronger than market expectations, a clear policy of leaning against currency weakness. A shift in this pattern, where the fix begins to align more closely with weaker estimates, would be a major signal that policymakers are becoming more tolerant of a lower yuan.
This is particularly relevant given that China’s exports fell 2.8% year-over-year in the second quarter of 2025, increasing the economic argument for a more competitive currency. We remember the sudden policy shift in August 2015, which reminds us that a gradual depreciation can quickly change course. Therefore, while the band offers tactical opportunities, holding longer-dated USD/CNY call options remains a sensible hedge against a potential surprise policy adjustment.
