The People’s Bank of China (PBOC) manages the daily midpoint for the yuan, which is also known as the renminbi or RMB. This central bank employs a managed floating exchange rate system, permitting the yuan to oscillate around a central reference rate within a designated “band”. Currently, this band is fixed at +/- 2%.
The Role of PBOC in Currency Management
Every day, the PBOC establishes a midpoint for the yuan against a collection of currencies, with the US dollar being predominant. Various factors are considered, including market supply and demand, economic indicators, and fluctuations in international currency markets. This midpoint acts as the reference for trading throughout the day.
The PBOC allows the yuan to fluctuate within a range set at +/- 2% from the midpoint. This means the yuan can rise or fall by up to 2% from the midpoint within a single day. If the currency nears the limits of this band or shows excessive volatility, the PBOC may step in. Such intervention involves buying or selling the yuan to ensure a gradual and controlled currency adjustment.
We see the People’s Bank of China is expected to set the USD/CNY reference rate near 7.1793. This continues a pattern we have observed for much of 2025, where the central bank has guided the yuan to the weaker side of its trading band. This likely reflects a desire to support China’s export sector, which reported a modest 1.5% year-over-year growth in the second quarter of 2025, falling short of market expectations.
Given the PBOC’s active management, we should not expect explosive volatility in the coming weeks. The daily fixing mechanism and the hard +/- 2% trading band serve as a powerful brake on any runaway moves, unlike the more volatile periods we saw during the 2019 trade disputes. This environment suggests that selling options to collect premium could be a viable strategy, as realized volatility has consistently remained below implied levels.
A Controlled Depreciation Framework
The key for us will be the daily spread between market estimates and the official PBOC fix. Over the past month, we have noticed the official fix has been consistently set stronger than market projections, signaling a desire to prevent a disorderly depreciation past the 7.20 mark. This suggests that while the weakening trend is tolerated, its pace is being carefully controlled.
This managed depreciation is happening against a backdrop of a wide interest rate differential between China and the United States, a gap that has persisted since the US Federal Reserve paused its hiking cycle in late 2024. This differential naturally puts downward pressure on the yuan, meaning the PBOC is managing a decline rather than trying to reverse it. We believe this dynamic will cap any significant yuan strength until we see a clear shift in US monetary policy or a major stimulus announcement from Beijing.
