Yesterday, China’s People’s Bank of China (PBOC) set the USD/CNY central rate at 7.1380. The PBOC is responsible for determining the daily midpoint of the yuan (also known as renminbi or RMB). It is through a managed floating exchange rate system. This system allows the yuan’s value to fluctuate within a specific range. It is known as a “band” around the central reference rate or “midpoint.” Currently, the trading band is set at +/- 2%, but some experts speculate that it might be widened to 3% during the year.
China’s PBOC- USD/CNY central rate at 7.1380
Here’s how the process works:
Daily midpoint setting. Every morning, the PBOC establishes a midpoint for the yuan against a basket of currencies. It is with the US dollar as the primary component. This setting takes into account factors like market supply and demand, economic indicators, and fluctuations in the international currency market. The midpoint acts as a reference point for that day’s trading.
The trading band. The PBOC allows the yuan to move within a specified range around the midpoint. At present, the trading band is set at +/- 2%, implying that the yuan can appreciate or depreciate by a maximum of 2% from the midpoint during a single trading day. However, the PBOC has the authority to adjust the trading band based on economic conditions and policy objectives.
Intervention. If the yuan’s value approaches the limits of the trading band or experiences excessive volatility, the PBOC may intervene in the foreign exchange market by buying or selling the yuan. This intervention aims to stabilize the currency’s value and facilitate a controlled and gradual adjustment.
It’s essential to note that the PBOC’s management of the yuan’s exchange rate has sparked controversy. Some critics claiming that the central bank undervalues the currency to gain a trade advantage. However, in recent years, China has taken steps towards a more market-oriented exchange rate system, providing greater flexibility in determining the yuan’s value.
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