PBOC Sets Firmer Yuan Fix as Daily Rate Edges Lower

Key Moments

Daily USD/CNY Fixing Update

On Wednesday, the People’s Bank of China (PBOC) set the central USD/CNY reference rate for the upcoming onshore trading session at 6.7249. This level is slightly stronger for the yuan compared with the prior day’s official fixing of 6.7298.

The newly announced central rate also contrasted with a separate 6.6922 estimate reported by Reuters.

PBOC: Mandate and Policy Focus

The People’s Bank of China’s primary monetary policy objectives are to safeguard price stability, including exchange rate stability, and promote economic growth. The central bank also seeks to advance financial reforms, including the opening and development of the domestic financial market.

The PBOC is owned by the state of the People’s Republic of China (PRC) and is not regarded as an autonomous institution. The Chinese Communist Party (CCP) Committee Secretary, who is nominated by the Chairman of the State Council, exerts key influence over the central bank’s management and policy direction rather than the governor. However, Mr. Pan Gongsheng currently holds both of these posts.

Key Monetary Policy Instruments

The PBOC employs a wider range of monetary policy tools than many Western central banks to pursue its objectives. Its main instruments include:

• Seven-day Reverse Repo Rate (RRR)
• Medium-term Lending Facility (MLF)
• Foreign exchange market interventions
• Reserve Requirement Ratio (RRR)

In addition, the Loan Prime Rate (LPR) serves as China’s benchmark interest rate. Adjustments to the LPR directly affect borrowing costs in the market for loans and mortgages, as well as returns on savings. By changing the LPR, the PBOC can also influence the exchange rate of the Chinese renminbi.

Private Banking in China

Private-sector participation in China’s banking industry remains limited. There are 19 private banks in the country, representing a relatively small portion of the overall financial system. The largest private institutions are digital lenders WeBank and MYbank, which are backed by Tencent and Ant Group, respectively, according to The Straits Times.

In 2014, authorities permitted domestically owned lenders funded entirely by private capital to operate within the largely state-dominated financial sector.