The People’s Bank of China (PBOC) set the USD/CNY central rate at 7.0187 for the trading session, an increase from the previous rate of 7.0173. The PBOC aims to maintain price stability, including exchange rate stability, and promote economic growth through financial reforms.
The PBOC is owned by the state of the People’s Republic of China and is influenced by the Chinese Communist Party Committee Secretary. Mr. Pan Gongsheng holds key roles within the PBOC, influencing its management and direction.
Monetary Policy Tools
The PBOC uses a range of monetary policy tools, differing from Western economies. These include the seven-day Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and Reserve Requirement Ratio. The Loan Prime Rate is a benchmark rate affecting loan, mortgage, and savings rates, influencing the exchange rate.
China has 19 private banks, including WeBank and MYbank, which are backed by tech companies Tencent and Ant Group. Private banks were allowed after a reform in 2014, enabling domestic lenders with private capital to operate in China’s financial sector, which had been dominated by state entities.
The central bank’s decision to set the USD/CNY reference rate weaker than market expectations is a significant signal for us. This move, at 7.0187 against a 6.9896 estimate, suggests authorities are comfortable with a more depreciated yuan. We should interpret this as a green light for further potential weakness in the currency over the near term.
This policy guidance likely stems from recent economic data we saw at the close of 2025. China’s exports fell for a third consecutive month in December 2025, declining by 1.8% year-over-year, and Q4 GDP growth came in at a softer-than-expected 4.9%. A weaker currency can help make Chinese goods cheaper and more competitive globally, providing a needed boost to the manufacturing sector.
Market Reactions
At the same time, the US Dollar has remained strong, with minutes from the Federal Reserve’s December 2025 meeting indicating a continued hawkish stance on inflation. This policy divergence between an easing PBOC and a tight Fed naturally puts upward pressure on the USD/CNY pair. We are seeing this dynamic play out across many currency pairs, not just the yuan.
For derivative traders, this increases the probability of higher volatility in the coming weeks. We should consider buying options strategies, like strangles or straddles on USD/CNH, that profit from a larger-than-expected price move in either direction, though the bias is now for yuan weakness. This weaker-than-expected fix opens the door for a more pronounced trend to develop.
Looking back, we saw the yuan weaken past 7.30 against the dollar during periods of economic stress in both 2022 and 2025. While we are not there yet, the current policy signal suggests that a test of the 7.10 level is becoming more likely. A sustained break above the 7.05 psychological level could attract more momentum traders, accelerating the move.
We must also watch for the PBOC to follow up with other policy tools mentioned, such as a cut to the Reserve Requirement Ratio (RRR) or the Medium-term Lending Facility (MLF) rate. Should export numbers for January not show improvement, the likelihood of such a move before the end of the first quarter increases substantially. This would further pressure the yuan and reinforce the current trading thesis.
