The People’s Bank of China (PBOC) sets the daily midpoint for the yuan (RMB) against the US dollar, following a managed floating exchange rate system. This allows the yuan’s value to fluctuate within a specified band of +/- 2% around the midpoint.
Each morning, the PBOC establishes this midpoint by considering market supply and demand, economic indicators, and international currency fluctuations. The trading band enables the yuan to move within a 2% range from this midpoint daily.
Managing Exchange Rate Stability
To manage stability, the PBOC may intervene in the foreign exchange market if the yuan nears the band limits or shows excessive volatility. This helps ensure gradual adjustments to the currency’s value.
Authorities in Beijing carefully monitor and adjust the yuan’s midpoint to align with both domestic economic conditions and global currency movements. When external pressures increase, such as shifts in US Federal Reserve policy or major geopolitical developments, officials may set the reference rate in a way that either dampens currency swings or guides market expectations.
Li, as governor of the central bank, plays a key role in these decisions. His team analyses economic data, capital flows, and inflation trends to determine whether the yuan should be guided stronger or weaker. Traders expecting large shifts in the exchange rate should take note of how these midpoint settings evolve, as repeated deviations from market estimates often indicate broader policy intentions.
US dollar movements remain an ever-present factor. As rates in Washington fluctuate, capital flow adjustments put direct pressure on the yuan’s exchange rate. If the dollar strengthens sharply, decision-makers in Beijing tend to set a firmer midpoint to prevent disorderly depreciation. Conversely, when the greenback weakens, they might allow a looser setting to support export competitiveness.
Market Intervention And Policy Signals
In recent weeks, fluctuations in offshore yuan markets have provided additional signals. If demand for the currency weakens abroad, it often leads to intervention domestically, either through state-owned banks selling dollars or adjustments to the daily midpoint. Repeated intervention typically suggests policymakers aim to restore confidence or prevent traders from testing the lower band limit.
In the coming weeks, interest rate expectations in the United States and domestic economic indicators in China will remain the primary drivers of policy moves. Should inflation data out of Beijing point to slowing growth, there may be increased tolerance for a weaker exchange rate to support businesses reliant on overseas demand. On the other hand, if concerns over capital outflows persist, expect efforts to reinforce stability by setting strong midpoints and using liquidity measures.
We have seen before that when the yuan approaches the edge of its allowed trading band multiple days in a row, the likelihood of intervention rises. A series of strong US inflation readings or unexpectedly hawkish Federal Reserve comments could push the yuan downward, forcing a more active stance from Beijing. Policymakers will not allow unchecked depreciation, particularly if market sentiment starts to shift rapidly.
Derivative traders focusing on short-term moves should keep a close eye on the daily midpoint’s deviation from market forecasts. Sudden, consistent variances often indicate authorities are attempting to send a message to currency markets. Patterns in liquidity injections or state bank activities in the offshore market can also serve as hints about broader intentions.
Policymakers are not expected to remove the yuan’s trading band or move to a free-floating system, meaning daily midpoint settings will continue to serve as a primary tool for currency guidance. Traders who ignore this mechanism risk misjudging trends, especially during heightened periods of global uncertainty. Those who track midpoint movements closely will gain better insight into policy priorities and potential shifts in intervention strategy.
