The People’s Bank of China (PBOC) is responsible for determining the daily midpoint of the yuan, also known as the renminbi. This midpoint is set against a basket of currencies, mainly the US dollar, and influences that day’s trading activities. The yuan operates within a managed floating exchange rate system, which allows fluctuations within a set range, or “band”, of +/- 2%.

Setting The Daily Midpoint

Each morning, the PBOC assesses market supply and demand, economic indicators, and fluctuations in the international currency market to establish the yuan’s midpoint. This reference point guides the day’s trading, allowing for controlled currency value adjustments. The trading band permits a maximum appreciation or depreciation of 2% from the midpoint each day, though this band can be adjusted by the PBOC in response to economic conditions.

In instances where the yuan’s value nears the band limit or experiences volatility, the PBOC may intervene by trading yuan to stabilise its value. Such interventions aim to maintain a measured and gradual currency adjustment. The system ensures currency stability while allowing for controlled shifts in value.

Based on the expected reference rate of 7.1845, we see the yuan is facing depreciation pressure. This level, while managed, reflects underlying economic challenges and a strong US dollar. Traders should anticipate the People’s Bank of China will continue to use the daily fix to slow, but not entirely prevent, this gradual weakening.

Recent economic figures support this cautious stance. We saw that China’s industrial production for July 2025 grew by just 3.9%, falling short of market expectations and indicating a continued slowdown. This weakness puts natural pressure on the currency, yet the PBOC has consistently set stronger-than-expected fixes to maintain stability.

Impact Of A Robust US Dollar

At the same time, the US dollar remains robust against most major currencies. The latest US inflation data from last month showed core prices are still sticky, leading many to believe the Federal Reserve will hold interest rates steady into 2026. This interest rate difference between the US and China will continue to attract capital towards the dollar.

For derivative traders, this suggests that while the direction may be a weaker yuan, the pace will be tightly controlled. Selling short-term volatility on the USD/CNY pair could be a prudent strategy, as the PBOC’s 2% trading band is expected to contain any major daily moves. The central bank is signaling stability above all else.

We can look back to a similar period in late 2023 when the yuan faced significant outflows. During that time, the PBOC aggressively managed the exchange rate for months, frustrating those who were betting on a sharp decline. This historical action shows the bank’s willingness to lean against market forces for extended periods.

Therefore, we will be closely monitoring the gap between the onshore yuan (CNY) and the more freely traded offshore yuan (CNH). A widening gap would indicate that market pressure is building beyond the central bank’s comfort level. This could signal a future adjustment in policy or a larger-than-expected move in the reference rate.

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