PBoC: to prevent forex overshooting risks

PBoC: to prevent forex overshooting risks

The People's Bank of China (PBoC) has been proactive in managing the yuan's exchange rate to prevent potential overshooting risks. In the past decade, China has transitioned from a heavily managed exchange rate to a more market-driven system, reducing its reliance on foreign reserves to defend the currency. This shift has been marked by the 2015 devaluation of the yuan, which was a significant move towards a more flexible exchange rate regime [1].

The PBoC has since diversified its toolkit to manage exchange rate volatility, employing a range of tools beyond direct use of foreign reserves. This includes setting a daily midpoint for the yuan against a basket of currencies, allowing the currency to fluctuate within a specified range, and intervening in the foreign exchange market when necessary [3].

Recent data indicates that the PBoC's efforts are paying off. Despite the ongoing trade tensions and economic slowdown, the yuan has shown relative stability. For instance, in July 2025, new yuan loans contracted by 50 billion yuan, marking the first contraction since July 2005 and the largest monthly decline since December 1999. This contraction was unexpected and suggests that the PBoC's policies are effective in managing the currency's value [2].

However, the PBoC continues to face challenges. The yuan's inclusion in the IMF's reserve currency basket has increased its international role, but it also brings potential risks of destabilizing swings. The PBoC must navigate these challenges while ensuring the currency remains stable and competitive in global markets.

Moreover, the rise of stablecoins and cryptocurrencies adds another layer of complexity to the PBoC's role. While stablecoins offer potential benefits for cross-border payments, their regulation remains a grey area. China has been cautious in its approach to stablecoins, but recent signals suggest that the country may be considering policy reforms to stay ahead in this emerging field [4].

In conclusion, the PBoC's efforts to prevent forex overshooting risks have been successful in maintaining the yuan's stability. However, the ongoing challenges and evolving landscape of global finance require the PBoC to continue adapting its strategies to ensure the yuan remains competitive and stable in international markets.

References:

[1] https://www.scmp.com/economy/china-economy/article/3321464/10-years-day-chinas-big-yuan-devaluation-set-shock-waves-what-has-changed
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3U507R:0-china-july-bank-loans-unexpectedly-contract-for-first-time-in-20-years/
[3] https://investinglive.com/centralbank/pboc-is-expected-to-set-the-usdcny-reference-rate-at-71743-reuters-estimate-20250814/
[4] https://www.thinkchina.sg/economy/big-read-stablecoins-are-reshaping-global-finance-can-china-keep?ref=top-hero