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How does the PBOC Fix Exchange Rates? (Yuan)

How does China Fix Exchange Rates?

The US dollar and the Japanese Yen, both of which have a free floating exchange rate, are not like the Yuan, which has its exchange rate strictly controlled by Beijing. This rate is managed by the People`s Bank of China (PBOC), which sets the so-called midpoint fix, based on the trading levels from the previous day as quotations are taken from interbank dealers. This is part of a series of tasks that the Central Bank is responsible for, including the complex monetary policy. This piece was sourced from an article on CNBC attributed to Saheli Roy Choudhury. With the trade war raging the obvious question that many investors have is, how much weakness with the Central Bank allow for the Yuan. The yuan is allowed to trade in a tight band and if it breaks out of that band, 2% to be exact, the Bank steps in and buys or sells yuan to push it back to baseline or midpoint.

The onshore yuan has weakened about 4% over the past month. Known as the offshore yuan, or CNH, the currency is not as tightly controlled as the onshore yuan. The onshore and offshore versions of the currency are kept somewhat tight in terms of trading so if intervention is needed in the offshore version, the Bank uses its foreign-exchange reserves which are now at more than $3 trillion as of July. The program is done by several banks and they swap US dollars for yuan. There are more tools in the box that the Bank uses, but it is important to keep in mind that it is one currency, two exchange rates. 

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