Here Are the Tools That China Uses to Manage the Yuan

Monitoring how the People’s Bank of China handles its “managed float” system for the foreign-exchange market isn’t easy: The central bank has various tools at its disposal, both public and hidden. Some are more transparent, like the daily reference rate; others are murky, such as the potential for Chinese authorities to secretly urge banks not to bet against the yuan in proprietary trading. With the currency this year dropping again this year toward rarely seen lows, the authorities have vowed to step up efforts to stabilize it.

It’s the most obvious tool the PBOC has to influence the currency. It sets a reference rate each trading day at 9:15 a.m. Beijing time, around which the yuan is allowed to move 2% in either direction. The rate takes into account factors including the prior day’s official close at 4:30 p.m., the yuan’s move against a basket of currencies and changes in other major exchange rates. Therefore, encouraging declines at the official close allows the central bank to set weaker fixings without sending a strong signal on policy or destabilizing markets. One way to grasp the policy signal behind the fixing is by comparing it with the market’s expectations. A reference rate that’s significantly stronger or weaker than expected is typically considered a signal from Beijing.