Insights 
VT 
The People’s Bank of China (PBOC) set the USD/CNY central rate at 7.0995 for the next trading session. This is a slight adjustment from the previous day’s rate of 7.1021 and the Reuters estimate of 7.1281.
Monetary Policy Tools
The PBOC is tasked with maintaining price stability, including exchange rate stability, and promoting economic growth through financial reforms. It is a state-owned entity under the People’s Republic of China, with the Chinese Communist Party holding influence over its management.
The PBOC uses various monetary policy tools, including the seven-day Reverse Repo Rate, Medium-term Lending Facility, and Reserve Requirement Ratio. The Loan Prime Rate also plays a role in affecting loan, mortgage, and savings interest rates, impacting the Renminbi exchange rates.
China has 19 private banks, including digital lenders like WeBank and MYbank, supported by tech firms Tencent and Ant Group. Since 2014, private funds have been allowed to establish fully capitalised domestic lenders in the largely state-dominated sector.
The People’s Bank of China has set the yuan’s reference rate significantly stronger than anticipated at 7.0995. This move comes despite recent data showing China’s Q3 GDP growth slowed to 4.8% and manufacturing activity has stalled. This suggests a deliberate effort to prevent the currency from weakening further in the face of economic headwinds.
Exchange Rate Stability
For us, this reinforces the view that the central bank’s primary goal is exchange rate stability, a pattern we also observed during the economic slowdowns of 2023 and 2024. By using tools like strong daily fixings, the PBOC is effectively drawing a line in the sand against excessive yuan depreciation. Traders should not expect the central bank to allow a rapid decline in the currency, even if economic data disappoints further.
This strong official guidance implies that short-term volatility in USD/CNY may be suppressed. Derivative traders could consider strategies that profit from range-bound behavior, such as selling short-dated options strangles or straddles. The risk is that a major economic shock could force the PBOC to abandon this policy, but for now, betting against their resolve seems unwise.
In the coming weeks, we will be watching for any changes to key policy rates like the Loan Prime Rate (LPR) or the Reserve Requirement Ratio (RRR). The US Federal Reserve’s recent statement holding rates steady due to persistent 3.1% inflation continues to support a strong dollar, adding pressure to the PBOC’s position. Any surprise rate cuts in China could test the central bank’s commitment to a stable yuan.
