China acts to rein in yuan slump, set to raise FX risk reserve ratio to 20%
SHANGHAI — China’s central bank said on Monday it will reinstate foreign exchange risk reserves for some forwards contracts, a move that would make betting against the yuan currency more expensive in order to slow the pace of recent depreciation.
The People’s Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the current zero, starting on Sept. 28.
The move to resume FX risk reserves would effectively raise the cost of shorting the yuan at a time the local currency is facing renewed depreciation pressure, traders and analysts said.
The yuan has been hit by a combination of broad dollar strength, China’s wobbly economy and an easier monetary bias adopted by authorities to prop up growth.
The downturn in Chinese currency has picked up speed after the PBOC lowered key interest rates in August to further widen its policy stance from other major economies that are raising rates aggressively.
The yuan has slumped more than 4% to the dollar since mid-August to breach the psychologically important 7 per dollar level, and is on course for its biggest annual loss since 1994, when China unified official and market exchange rates.
Spot yuan hardly budged on the announcement. The onshore yuan traded at 7.1450 per dollar, versus the previous late night close of 7.1298 on Friday. Its offshore counterpart briefly bounced to 7.13 before last fetching 7.1513 as of 0143 GMT
Over recent months, authorities have stepped up efforts to rein in yuan weakness through persistently setting firmer-than-expected midpoint fixings, verbal warnings and holding off immediate easing moves.
Monday’s announcement marks the latest policy measure to stem the faltering currency after the PBOC announced it will lower the amount of foreign exchange that financial institutions must hold as reserves earlier this month.
China’s central bank scrapped the risk reserve requirements in October 2020, when the yuan rose sharply. (Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill & Shri Navaratnam)
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