Recently, the Monetary Policy Committee of the People's Bank of China held its third-quarter 2026 regular meeting.

This meeting introduced two new statements: "adhere to the decisive role of the market in exchange rate formation" and "prevent the market's 'herd effect' and the self-reinforcement of irrational expectations," balancing the resolve for market-oriented exchange rate reform with bottom-line thinking on risk prevention and control, and sending a clear signal to stabilize the exchange rate, the market, and expectations.

Currently, China implements a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies, in which the market plays a decisive role in RMB exchange rate formation.

Since the beginning of this year, the RMB exchange rate against the US dollar has generally continued to appreciate, and recently both the onshore and offshore RMB exchange rates against the US dollar broke through the 6.7 mark during intraday trading, hitting a new stage high.

Against this backdrop, the meeting specifically emphasized "adhering to the decisive role of the market in exchange rate formation," which on the one hand demonstrates respect for market mechanisms, and on the other hand once again anchors the direction of China's market-oriented exchange rate reform and stabilizes market confidence in the long-term institutional reform.

In recent years, the maturity of China's foreign exchange market has continued to improve, the flexibility of the RMB exchange rate has continued to strengthen, the characteristics of two-way fluctuation have become increasingly evident, the role of market supply and demand in exchange rate formation has continued to rise, and the ability of enterprises and financial institutions to adapt to exchange rate fluctuations has significantly increased.

The core essence of adhering to the decisive role of the market in exchange rate formation is to allow the exchange rate to better reflect changes in economic fundamentals, give play to the exchange rate's function as an automatic stabilizer for macroeconomics and the international balance of payments, and continuously consolidate the institutional foundation of market-oriented exchange rate reform.

The newly added statement of "preventing the market's 'herd effect' and the self-reinforcement of irrational expectations" reflects the People's Bank of China's forward-looking assessment of short-term exchange rate fluctuation risks.

Once a unilateral appreciation or depreciation expectation forms in the foreign exchange market, it can easily trigger follow-the-trend trading, causing the exchange rate to deviate significantly from a reasonable equilibrium level in the short term and creating overshooting risks.

Based on past patterns, the fourth quarter is the traditional period for concentrated foreign exchange settlement by Chinese enterprises, and the increase in seasonal settlement demand often drives temporary RMB strengthening.

Coupled with support from fundamentals such as export growth remaining at a relatively high level, it is easy for a consensus expectation of unilateral RMB appreciation to form in the market.

If such expectations are allowed to ferment continuously and self-reinforce, it could not only amplify exchange rate fluctuations and undermine the competitiveness of export enterprises, but even disrupt the stable operation of the macroeconomy.

By explicitly proposing at this time to prevent the "herd effect," the People's Bank of China is also giving the market an early "preventive shot," guiding market participants to establish a "risk-neutral" concept, avoiding irrational chasing of rises and dumping during falls, and maintaining the smooth operation of the foreign exchange market.

It should be noted that despite the two newly added statements, the core orientation of "enhancing the resilience of the foreign exchange market, stabilizing market expectations" and "keeping the RMB exchange rate basically stable at a reasonable and balanced level" remains unchanged, reflecting the continuity and stability of policy.

In recent years, the depth and breadth of China's foreign exchange market have continued to expand, market participants have become increasingly mature, the foreign exchange hedging ratio of enterprises has steadily increased, and their ability to cope with exchange rate fluctuations has significantly strengthened.

Data from the State Administration of Foreign Exchange show that in the first half of this year, the proportion of transactions in which enterprises used foreign exchange derivatives for hedging reached 35.3%, an increase of 5.3 percentage points from 2025, which is an important manifestation of the improved resilience of the foreign exchange market.

Stabilizing market expectations is an important part of exchange rate management. Through continuous and clear policy communication, the People's Bank of China guides the market to correctly understand policy intentions, reduces misreading and overinterpretation, and reduces irrational fluctuations at the source.

In the future, the RMB exchange rate will continue to remain basically stable at a reasonable and balanced level.

On the one hand, China's long-term positive economic fundamentals, basically balanced international balance of payments, and ample foreign exchange reserves provide solid support for exchange rate stability; on the other hand, as the degree of exchange rate marketization continues to increase, the decisive role of market supply and demand will become more apparent, and two-way exchange rate fluctuations will become the norm.

Market participants should firmly establish a "risk-neutral" concept, actively use foreign exchange derivative tools to manage exchange rate risks, view exchange rate fluctuations rationally, and jointly create a healthy and stable foreign exchange market environment.