The recent escalation in trade tensions left analysts and investors wondering how much further Beijing would allow the currency to weaken. Here’s a look at how China controls the yuan, also known as the renminbi. Unlike other major currencies such as the U.S. dollar or the Japanese yen, which have a free floating exchange rate, China maintains strict control of the yuan’s rate on the mainland.
Every morning, the People’s Bank of China (PBOC) sets a so-called daily midpoint fix, based on the yuan’s previous day closing level and quotations taken from inter-bank dealers. The central bank also manages China’s complex monetary policy. The currency is allowed to trade within a narrow band of 2% above or below the day’s midpoint rate. If it deviates too far, according to some market watchers, the Chinese central bank steps in to buy or sell the yuan, putting a lid on its daily volatility. This exchange rate is known as the onshore yuan, or CNY.