The People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0656 on Monday, slightly higher than Friday’s rate of 7.0638. The PBOC, as China’s central bank, aims to safeguard price stability and promote economic growth, while also implementing financial reforms.
The PBOC is owned by the state of the People’s Republic of China and is influenced by the Chinese Communist Party. The committee secretary nominated by the State Council chairman has a major role in its direction. At present, Mr. Pan Gongsheng holds both key positions within the PBOC.
PBOC Policy Tools
To achieve its objectives, the PBOC uses a range of policy tools, including the Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio. The Loan Prime Rate (LPR) is China’s benchmark interest rate, affecting loan and mortgage rates, savings interest, and the Renminbi exchange rate.
China permits private banks, with 19 existing in the sector, including digital lenders WeBank and MYbank supported by Tencent and Ant Group. In 2014, China allowed domestic lenders funded by private capital to join its predominantly state-run financial sector.
Today’s weaker fixing of the yuan against the dollar at 7.0656 is a subtle but important signal from the People’s Bank of China. We see this as an official acceptance of a gently depreciating currency path. This move is likely a direct response to recent economic data showing a slowdown.
This policy direction makes sense when we look at the disappointing November 2025 export data, which showed only a 1.2% year-over-year increase, missing market expectations. A weaker yuan makes Chinese goods cheaper for international buyers, providing a much-needed boost to the manufacturing sector heading into the new year. This is a classic tool the PBOC uses to support economic growth targets.
Market Implications
On the other side of the currency pair, recent strength in the US dollar is also a factor, driven by November’s surprisingly strong US retail sales figures which rose 0.8%. This has led to speculation that the US Federal Reserve will be slower to cut interest rates in 2026. This allows the PBOC some cover to guide the yuan lower without it looking like a major devaluation.
This situation reminds us of the economic sluggishness we saw back in 2023 during the post-pandemic recovery. Back then, Chinese authorities also used a combination of monetary easing and a managed currency depreciation to support the economy. We are seeing a similar playbook unfold now, especially after the 25 basis point cut to the Reserve Requirement Ratio in late November.
For derivative traders, this suggests that implied volatility on the yuan may rise in the coming weeks. We believe buying CNH put options, which profit if the yuan weakens further, could be a prudent strategy to hedge against or speculate on this trend. These options are currently not pricing in a sharp move, offering an attractive risk-reward profile.
Considering this easing bias, we should also be looking at forward contracts. Traders might position for a higher USD/CNY rate in the first quarter of 2026, possibly targeting levels above 7.10. The combination of weak domestic data and a strong dollar creates a clear path for this continued, managed depreciation.
