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. This system permits the yuan to fluctuate within a determined range, labelled a “band,” around the central reference rate. The current band is set at +/- 2%.
Each morning, the PBOC establishes a midpoint for the yuan against a basket of currencies, with a focus on the US dollar. The midpoint determination considers factors like market supply and demand, economic indicators, and international currency market movements. This midpoint acts as a reference for the day’s trading.
Midpoint Determination And Trading Band
The yuan’s trading band allows for a movement of up to 2% above or below the midpoint each trading day. The PBOC can adjust this range in response to economic conditions and policy needs. Should the yuan’s value approach the limits of the band or show excessive volatility, the PBOC may intervene. They do so by buying or selling yuan to stabilise its value, aiming for a controlled and gradual adjustment.
What this article outlines is the way the Chinese central bank exerts influence over the currency market—though not by setting a fixed rate, but by steering it within permitted daily boundaries. This is managed through a benchmark rate, known as the midpoint, issued each morning before onshore trading activity begins. Think of it as the anchor around which any value change must happen, albeit in a controlled corridor.
Because the currency is permitted to fluctuate up to 2% either side of this midpoint, the method offers flexibility while also retaining a firm hand over momentum. This midpoint isn’t plucked out of thin air. It’s derived from closing rates recorded in the previous day’s interbank activity, as well as external factors like dollar strength, trade flows, and internal economic cues. The basket of currencies also plays a part, but the US dollar dominates the structure, as expected.
Now, when prices swing too fast or edge too close to that outer 2% perimeter, intervention typically follows. This isn’t guesswork—it’s action aimed to prevent disorder, which could cause uncertainty elsewhere. Intervention takes the form of issuing short-term liquidity or swapping foreign reserves. So, while this is a floating system in terminology, it operates in practice a lot more like finely tuned oversight.
That in itself is what we need to keep at the front of mind. These are not random moves—they are tightly modelled, frequently adjusted policies responding to real-time conditions. In the near term, abrupt shifts in the dollar or sharp alterations in the direction of other major currencies are likely to feature heavily in the central authority’s thinking, due to the ongoing volatility in broader financial markets.
Impact Of External And Domestic Factors
Moreover, inflation readings domestically, export activity, and fiscal measures rolled out in Beijing continue to affect the midpoint’s drift. We should anticipate that liquidity management through open-market operations will increase in correlation with any building imbalance visible in cross-border capital flow data. These outcomes signal more transparency in daily fixes but also warn that artificial spikes or sharp dips will not be allowed to take hold.
Going forward, traders who rely heavily on late-session pricing in regional markets should be alert to any pre-fix guidance released overnight or in early Asia. We’ve seen in past quarters that surprises in the midpoint can become the day’s driver, particularly in conditions when overnight swap rates start to deviate from expectations. We should factor in the speed and timing of central moves. An unexpected change in forward book hedging or targeted dollar liquidity injections can rattle pricing well within the conventional range.
It would be unwise to overlook the technical patterns in the CFETS basket. While it plays a supporting role, any rebalance in weightings can have an echo effect, especially when mirrored by other Asian central banks looking to preserve regional positioning. Adjustments in relative strength between these components should therefore continue to be monitored—not as isolated shifts, but as early hints of where the reference band might gravitate next.
In recent sessions, we’ve also seen spot traders take direction not just from fundamental data, but from inferred policymaker intent. When authorities lean into stability language, even mildly, the deviation between onshore and offshore pricing begins to narrow. These spread compressions offer hints of upcoming intervention or administrative enforcement, such as increased scrutiny on forward trades or limits on capital outflow channels.
We find that pricing near the outer edge of the band draws outsized focus from leveraged accounts, often triggering correction flows purely on positioning. There’s opportunity in that volatility, but also clear risk. Historical patterns show that when values cling persistently near the top or bottom of the allowed range, some form of intervention almost always follows—it’s never left unattended.
Finally, the broader monetary backdrop is shifting daily. Treasury yields in the US are oscillating rapidly, which filters through indirectly via swaps and cross-currency rates. The PBOC will be looking at the yield gap and weighing it against domestic credit goals. In particular, any sign of strain in interbank lending or temporary stress in smaller regional banks may elicit an asymmetric response on the FX side.
As we watch for the next move, staying tethered to both the midpoint drift and official communication remains key. We as market participants must look beyond the midpoint itself and pay attention to what’s building behind it—the signals lie not only in what is said, but in what is permitted to happen.
