The People’s Bank of China (PBOC) sets the daily midpoint for the yuan (RMB) as part of its managed floating exchange rate system. This system allows the currency to fluctuate within a band of +/- 2% around the midpoint. This approach helps control the yuan’s exchange rate against a basket of currencies, with a strong focus on the US dollar.
Midpoint Determination
Each morning, the PBOC determines this midpoint by considering market conditions, supply and demand dynamics, economic data, and fluctuations in international currency markets. This serves as a reference point for trading throughout the day. The yuan is allowed to move within the specified 2% range around this midpoint during the trading day.
The PBOC may intervene in the currency market to address excessive volatility or if the yuan’s value nears the limits of the trading band. Such interventions involve buying or selling the currency to help stabilise its value. This process supports a more controlled and gradual adjustment of the yuan’s market value, aligning with China’s economic conditions and policy goals.
The expected USD/CNY midpoint of 7.1748 signals a continued tolerance for a managed depreciation of the yuan. We see this as a direct response to recent economic data, which has pointed towards a slowdown. This guidance from the central bank suggests the path of least resistance for the currency is downwards in the near term.
Given the managed nature of the currency, we should consider buying US dollar call options against the yuan. The PBOC’s daily management within the 2% band typically suppresses sharp, unexpected moves, keeping implied volatility relatively contained. Looking back at similar periods in 2023, we saw that even as the yuan weakened past 7.30, daily volatility remained low, rewarding those who bought direction without overpaying for protection.
Hedging Strategies
This view is supported by the clear policy divergence between a still-cautious US Federal Reserve and a more accommodative PBOC. Recent data from July 2025 showed Chinese exports contracting by 3.5% year-over-year, and Q2 GDP growth came in slightly below consensus at 4.2%. This pressure makes a weaker yuan a necessary tool for supporting the domestic economy.
For traders managing corporate exposures, this is a clear signal to review hedging strategies. The cost of hedging against further yuan weakness using forward contracts is likely to increase if this trend continues. Locking in forward rates now could prove prudent for those with future payables in US dollars.
