The People's Bank of China (PBOC) is responsible for determining the daily midpoint of the yuan (also known as renminbi or RMB) against other major currencies, especially the US dollar. This process is a cornerstone of China's managed floating exchange rate system, which permits the yuan's value to move within a specified range, currently set at +/- 2% from the central reference rate. This dynamic system aims to balance market forces with monetary policy objectives.
The methodology employed by the PBOC involves several key steps to ensure currency stability and flexibility. Each morning, the central bank establishes a midpoint for the yuan, taking into account various factors such as prevailing market supply and demand, key economic indicators, and shifts in international currency markets. This daily midpoint then acts as the anchor for the day's trading activities. Within this framework, the yuan is allowed to trade within the aforementioned 2% band, meaning its value can either appreciate or depreciate by up to 2% from the set midpoint in a single trading session. Furthermore, if the yuan's value approaches the extremes of this trading band or experiences excessive volatility, the PBOC reserves the right to intervene in the foreign exchange market. Such interventions, involving the buying or selling of yuan, are strategic actions designed to stabilize the currency and facilitate its gradual and controlled adjustment in response to evolving economic conditions and policy goals.
This structured approach to currency management reflects China's commitment to maintaining a stable financial environment while gradually allowing greater market influence on its currency. The PBOC's actions in setting the daily reference rate and managing the trading band are vital for both domestic economic stability and international financial relations. It underscores a careful balance between market liberalization and state control, navigating the complexities of global finance to serve China's broader economic interests.