The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as renminbi (RMB), using a managed floating exchange rate system. The system allows the yuan’s value to fluctuate within a 2% band around a central reference rate.
Factors for Determining Yuan’s Midpoint
Each morning, the PBOC establishes a midpoint for the yuan against a basket of currencies, mainly the US dollar. The bank evaluates factors such as market supply and demand, economic indicators, and international currency trends to determine this midpoint.
The PBOC permits the yuan to move within a 2% range around the midpoint. This means the currency can increase or decrease in value by up to 2% from the set midpoint during a single trading day.
If the yuan’s value nears the band’s limit or becomes overly volatile, the PBOC may intervene by buying or selling the yuan. This action helps ensure a stable and gradual currency valuation adjustment.
In a separate update, China is anticipated to keep lending rates unchanged for the fifth consecutive time, despite the US Federal Reserve’s recent rate cut.
With the People’s Bank of China holding its lending rates steady for the fourth straight month, we are seeing a clear policy divergence from the West. This comes just weeks after the US Federal Reserve cut its own benchmark rate in early September 2025, citing slowing inflation and a softening labor market. This growing difference in interest rate policy is the most important factor for the yuan in the coming weeks.
Bond Market Reactions
The widening interest rate advantage for the yuan is already being reflected in bond markets. The yield spread between Chinese 10-year government bonds and U.S. 10-year Treasuries has narrowed to its tightest point in over two years, making it more attractive to hold yuan-denominated assets. Looking back at the data from earlier this year, we saw a spread of over 120 basis points, which has now collapsed to under 50 basis points, creating fundamental support for the currency.
For derivative traders, this environment suggests that implied volatility on the USD/CNY pair may be overstated. The PBOC’s strong hand in guiding the currency, demonstrated by today’s firm reference rate, points towards a controlled, gradual appreciation of the yuan rather than sharp, unpredictable moves. Selling out-of-the-money options to collect premium could be a viable strategy, as we anticipate the pair will remain within a predictable range.
The path of least resistance for the USD/CNY appears to be downwards. The combination of a dovish Fed and a stable PBOC should put sustained pressure on the pair. We saw a similar dynamic in reverse during the 2022-2023 period when aggressive Fed hikes and Chinese easing pushed the USD/CNY rate significantly higher.
However, we must watch the daily reference rate settings very closely for any change in the central bank’s tone. The key risk is that Chinese export data for September, due in a few weeks, comes in weaker than expected, prompting the PBOC to guide the yuan lower to support its economy. For now, the strategy is to position for a stronger yuan while being mindful of the +/- 2% daily trading band as the ultimate boundary for price action.
