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China will cut the amount of foreign exchange that financial institutions must hold as reserves for the first time this year in a move seen aimed at curbing the yuan’s weakness.
The People’s Bank of China (PBOC) will cut financial institutions’ foreign exchange reserve requirement ratio (RRR) by 200 basis points to 4% from 6%, effective from Sept. 15, to “improve financial institutions’ ability to use foreign exchange funds”, according to a notice on Friday.
China’s foreign exchange deposits stood at $821.8 billion at the end of July, according to PBOC’s data, which means the latest 200-bps cut to FX reserve ratio will effectively free up $16.4 billion worth of foreign exchange with China’s FX deposits standing at $821.8 billion at end-July.
The FX RRR cut should lower dollar funding costs in the interbank market and alleviate the downward pressure on the yuan, analysts said.
The yuan rebounded in both onshore and offshore market to three-week highs after the news. The onshore yuan surged to a high of 7.2360 per dollar in the early Asian session, the strongest level since Aug. 11.
However, the move is more of signal to markets that it was planning to lean harder against rapid weakening of the yuan and it’s unlikely to reverse the downward trend of the yuan,
The yuan is one of the worst-performing Asian currencies this year, down about 5% against the dollar amid a sharp slowdown in China’s economy and widening yield differentials with the US.
Friday’s policy move also comes as China steps up efforts to support the yuan by persistently setting firmer-than-expected daily fixing and reportedly asked major state-owned banks to repeatedly sell dollars in both onshore and offshore markets to stem rapid yuan losses.
The central bank in July adjusted a parameter to allow companies to borrow more overseas, so they could bring in foreign currency to be converted onshore, thereby supporting the yuan.
The PBOC previously cut the FX reserve requirement ratio for financial institutions by 200 basis points in September 2022, in a bid to rein in a weakening yuan and make it less expensive for banks to hold dollars.