Insights 
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On Thursday, the People’s Bank of China (PBOC) set the USD/CNY central rate at 7.1102, up from 7.1055 before the holiday. This adjustment compared to a Reuters estimate of 7.1484.
The PBOC, owned by the state of China, is not an autonomous body. Its primary monetary policy goals include price and exchange rate stability, in addition to promoting economic growth.
Key Monetary Policy Tools
Key monetary policy tools of the PBOC differ from those in Western economies. They include the seven-day Reverse Repo Rate, Medium-term Lending Facility, and Reserve Requirement Ratio, with the Loan Prime Rate influencing market loan rates and exchange rates.
China includes 19 private banks within its financial system. These private banks include WeBank and MYbank, backed by Tencent and Ant Group.
The information here remains for educational purposes and does not make any investment recommendations. There is a warning that financial instruments involve risks, including the potential loss of principal.
The People’s Bank of China has set the daily reference rate for the yuan at 7.1102 against the dollar, a level significantly stronger than market expectations. This move signals a clear intent from authorities to prevent the currency from weakening too quickly. We should view this as a deliberate effort to stabilize the yuan amidst broader market uncertainty.
This action is likely a response to ongoing domestic economic pressures, particularly in the property sector, which has been a concern since the crisis deepened back in 2023. We have seen property investment figures decline by nearly 9.8% year-over-year in the most recent quarter, a trend that authorities are trying to counteract by ensuring currency stability to prevent capital outflows. A stable yuan is crucial for maintaining overall financial confidence.
Economic Strengths and Trade Resilience
However, the Chinese economy is not without its strengths, which gives the central bank some room to maneuver. Recent data shows exports have been resilient, helping China post a trade surplus of over $75 billion last month. This persistent surplus provides a steady inflow of foreign currency that naturally supports the yuan.
For derivative traders, this strong official guidance suggests that the upside for the USD/CNY pair is capped in the coming weeks. Selling call options on USD/CNH with strikes around the 7.18 to 7.20 level could be an attractive strategy to collect premium from expected range-bound trading. The central bank has effectively communicated its discomfort with any significant moves above this zone.
The primary risk to this view would be a sudden and sharp strengthening of the US dollar, perhaps if the current US government shutdown resolves unexpectedly, or a surprise downturn in Chinese economic data. To manage this, using defined-risk strategies like a call credit spread would be more prudent than selling uncovered calls. This approach allows us to act on the view that the yuan will hold firm while strictly limiting potential losses.
