China cuts forex reserve requirement ratio in bid to support tumbling yuan

Financial institutions will need to hold 6% of their foreign-currency deposits in reserves starting from Sept. 15, the PBOC said in a statement on Monday-- lower than the current level of 8%

China slashed the amount of foreign-exchange deposits banks need to set aside as reserves for the second time this year to boost the yuan after the currency hit a fresh two-year low.

Financial institutions will need to hold 6 per cent of their foreign-currency deposits in reserves starting from Sept. 15, the People’s Bank of China said in a statement on Monday-- lower than the current level of 8 per cent. The move is expected to increase the supply of foreign currencies, thereby making it more appealing for traders to buy the yuan.

The yuan slid as concerns over monetary-policy tightening in the US and a deepening energy crisis in Europe bolstered the dollar. And while the string of stronger-than-expected PBOC fixings have slowed the yuan’s slide, banks including Goldman Sachs Group Inc. still expect it to fall to 7 per dollar as concerns over a Covid lockdowns in major Chinese cities and a sluggish property sector weigh on the economy.

“The PBOC sent a strong signal to defend the yuan exchange rate,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management Ltd. “This action shows the PBOC is not willing to tolerate a sharp yuan depreciation against the US dollar,” he said.

Speaking shortly before the FX deposit ratio was cut, PBOC Deputy Governor Liu Guoqiang told reporters in Beijing that China was able to maintain the yuan at a stable level, adding that it will be a “norm” in the short term for the Chinese currency to move in two ways.

The yuan trimmed losses following the move but remained lower on the day. The onshore yuan was down 0.4 per cent to 6.9311 per dollar while the offshore unit dropped 0.4 per cent to 6.9400 at 5:54 pm in Shanghai after falling to the lowest since 2020.

“The cut shows the PBOC’s stance to slow the yuan’s depreciation pace, but is unlikely to reverse the course,” said Ken Cheung, currency strategist at Mizuho Bank Ltd.“ The action was partially expected following a series of stronger yuan fixings and the impact should prove to be mild,” he added.

The PBOC last cut the reserve ratio for foreign exchange deposits in April when the yuan fell more than 4 per cent in reaction to a city-wide lockdown in Shanghai. The onshore yuan fell 2.2 per cent last month and is on track for its seventh straight month of losses.

China’s financial institutions held $953.6 billion of foreign-currency deposits as of July, down from a record $1.1 trillion in February. The stockpile has served as a buffer for the yuan amid headwinds. The Chinese currency is still around levels seen in December in trade-weighted terms, according to the CFETS RMB Index.

PBOC’s decision to cut banks’ forex deposit reserve ratio will likely add $20 billion of foreign currency on the market, not a big number, says Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group. Further room for another cut will be small, he added.