China to cut FX reserve ratio to help limit yuan weakness

US dollar and Chinese yuan banknotes are seen in this illustration photo taken June 14, 2022. REUTERS/Florence Lo/Illustration

Join now for FREE unlimited access to

SHANGHAI, Sept 5 (Reuters) – China’s central bank said on Monday it would cut the amount of foreign exchange reserves financial institutions must hold, a move seen as aimed at slowing the yuan’s recent depreciation.

The People’s Bank of China announced that it would cut the required foreign reserve ratio (RRR) to 6% from 8% from September 15, according to an online statement.

The PBOC said the reduction was aimed at improving “the ability of financial institutions to utilize foreign currency capital,” the statement added.

Join now for FREE unlimited access to

The move came after the Chinese yuan recently fell to its lowest level in two years. Since the beginning of the year, the yuan has depreciated by 8% against the dollar, due to the general strength of the dollar in world markets and the worsening economic slowdown in China.

Reducing reserve requirements would increase dollar liquidity. Based on end-July data, when foreign exchange reserves stood at $953.7 billion, lower requirements would free up about $19 billion.

“It’s not a huge amount compared to cross-border revenue,” said Frances Cheung, rates strategist at OCBC Bank.

“Yet the market is paying attention to the signal sent by the central bank.”

The onshore and offshore yuan briefly rebounded around 200 pips after the PBOC statement and pared some of its earlier losses.

Some traders and analysts said the decline was expected and was partly a signal to the market that a rapid decline in the yuan would be unwelcome.

“While recent daily median yuan fixings were consistently stronger than market expectations, official PBOC action to stabilize the yuan was already in line with market expectations,” said Ken Cheung, chief currency strategist. Asians at Mizuho Bank.

The PBOC has set firmer-than-expected median guidance rates over the past two weeks, with many market participants interpreting this as a sign of official efforts to rein in yuan weakness.

Bruce Pang, chief economist at Jones Lang Lasalle, said Monday’s announcement showed authorities had begun to adopt appropriate policy and macroprudential tools to iron out excessive yuan volatilities.

“It could calm one-way depreciation bets against the yuan and ease the pressure of a rapid yuan depreciation,” Pang added.

Major investment firms have lowered their forecasts for the yuan as its slide against the dollar has accelerated since mid-August, with some expecting a breakout of 7 to 1 before the congress politically sensitive party next month despite authorities’ efforts to slow the slide.

The PBOC last cut the foreign exchange reserve requirement ratio by 100 basis points in April, in a bid to rein in the decline of the yuan and make it cheaper for banks to hold dollars.

Join now for FREE unlimited access to

Reports from the Beijing Monitoring Bureau; Editing by Hugh Lawson and Simon Cameron-Moore

Our standards: The Thomson Reuters Trust Principles.

Sallie R. Loera