China curbs yuan’s decline, prepares to raise FX reserve ratio to 20%

China curbs yuan’s decline, prepares to raise FX reserve ratio to 20%

SHANGHAI (Reuters) – China’s central bank said on Monday it will restore foreign exchange risk reserves for some futures contracts, a move that would make betting on the yuan currency more expensive in order to slow the pace of the recent decline.

The People’s Bank of China (PBOC) said it will raise the foreign exchange risk reserves of financial institutions when buying foreign currencies through futures contracts to 20% from the current zero, starting from September 28.

Traders and analysts said a move to resume foreign currency risk reserves would effectively raise the yuan’s selling cost as the local currency faces renewed depreciation pressure.

The yuan was affected by a combination of the broad dollar strength, a volatile Chinese economy, and the easier monetary bias adopted by the authorities to support growth.

Deflation in the Chinese currency accelerated after the People’s Bank of China (PBOC) cut key interest rates in August to widen its policy stance on aggressive rate hikes by other major economies.

The yuan has fallen more than 4% against the dollar since mid-August to break through the psychologically important 7 dollar level, and is on track for its biggest annual loss since 1994, when China unified its official and market exchange rates.

The instant yuan barely buds upon the announcement. The dollar traded 7.1450 against the late-night close of 7.1298 on Friday. Its offside bounced briefly to 7.13 before it last fetched 7.1513 as of 0143 GMT.

Over the recent months, the authorities have intensified their efforts to rein in the yuan’s weakness by continuing to put in stronger-than-expected mid-point fixes, verbal warnings, and halting immediate easing moves.

Monday’s announcement represents the latest political action to stem the currency’s faltering after the People’s Bank of China (PBOC) announced it would cut the amount of foreign currency that financial institutions must hold as reserves earlier this month.

READ ALSO :   China will aim to stabilize employment and prices - Monetary Policy Division of the People's Bank of China

The Chinese central bank canceled the risk reserve requirement in October 2020, when the yuan rose sharply.

The Latest

To Top