PBOC sets USD/CNY fix at 6.8157 as yuan extends 3% rally

The People's Bank of China set its daily yuan midpoint at 6.8157 per dollar, the strongest level in weeks, as the currency extends a 3% rally that has reshaped the dynamics of China's foreign exchange market.

The People's Bank of China set its daily yuan midpoint at 6.8157 per dollar Thursday, extending a 3% rally that Bank of America says is now driven by exporter dollar conversions rather than traditional economic fundamentals.

"Strong overseas demand for Chinese exports has generated a steady supply of dollars flowing into the domestic market, and companies are increasingly willing to convert those earnings into yuan," Bank of America said in a research note. "Expectations for yuan appreciation have encouraged exporters to convert more dollars, reinforcing support for the currency."

The onshore yuan traded near 6.77 against the greenback after the fix, which compared with Wednesday's 6.8203. The currency has strengthened more than 3% against the dollar this year despite trade tensions and weaker terms of trade, BofA noted. The bank argues that exporter-related currency flows have become the dominant driver of USD/CNY direction, while portfolio investment flows have had limited impact due to low foreign ownership of Chinese assets and managed capital outflows.

The PBOC's willingness to set firmer fixes indicates comfort with the yuan's appreciation trajectory, though BofA cautions that a sustained dollar rally — with the Dollar Index moving into the 102-105 range — would be needed to materially challenge the currency's momentum. Markets now watch for the next PBOC fix and any signals from the central bank's quarterly monetary policy committee meeting.

The Hidden Hand of State Banks

Beyond the daily fix, a broader question hangs over the yuan's strength: how much of it reflects market forces versus state-directed intervention. Brad Setser, a former U.S. Treasury official and now a fellow at the Council on Foreign Relations, has documented that the foreign assets of China's state commercial banks surged by roughly $700 billion over the past 12 months — a buildup that coincides with the yuan's appreciation pressure.

The PBOC has argued that this reflects state banks simply investing domestic foreign currency deposits abroad, not backdoor intervention. But the pattern is suspicious, Setser notes. Foreign currency deposits have moved in the opposite direction of interest rate differentials, rising when the yuan faced appreciation pressure and falling during depreciation episodes — the opposite of what economic logic would predict.

What's at Stake for Global Markets

The yuan's strength carries implications beyond China's borders. A firmer yuan reduces imported inflation for Chinese manufacturers, supports consumer purchasing power, and gives the PBOC more room to ease domestic monetary policy if needed. But it also pressures export competitiveness at a time when global trade tensions remain elevated.

For emerging market currencies, a stable or strengthening yuan provides a positive anchor. The Chinese currency's 3% gain against the dollar this year contrasts with weakness in other Asian peers, reinforcing the view that China's capital controls and state-directed FX management allow it to maintain a degree of insulation from global dollar strength.

The last time the PBOC maintained a sustained run of firmer fixes was in early 2022, when the yuan strengthened to near 6.30 against the dollar before a sharp reversal later that year as the Fed embarked on its most aggressive tightening cycle in decades. The current dynamic differs: the Fed is on hold while Chinese exports remain strong, giving the PBOC more latitude to manage the currency's trajectory.

The next test comes with the PBOC's monthly fixing trajectory. If the central bank continues to set firmer midpoints, it would indicate a deliberate policy of allowing gradual yuan appreciation — a shift from the depreciation bias that prevailed through much of 2022 and 2023.

This article is for informational purposes only and does not constitute investment advice.