China cuts banks’ forex reserve ratio as yuan hits 2-year low against US dollar (2024)

China has announced a cut to the foreign exchange reserves that banks must set aside, sending “a strong signal” to stem the recent depreciation of the yuan as the central bank warns the market not to bet against the currency.

The People’s Bank of China said it would cut the foreign exchange reserve requirement ratio to 6 per cent from 8 per cent, effective September 15. The move is aimed at boosting dollar liquidity and improving the ability of financial institutions to use foreign exchange funds.

Still, as the yuan reached its weakest point against the US dollar in more than two years on Monday, China’s central bank downplayed concerns.

In the onshore market, the yuan closed at 6.9366 against the US dollar on Monday, weaker than Friday’s close of 6.9003.

Liu Guoqiang, deputy governor of the People’s Bank of China (PBOC), said at a press conference on Monday that the yuan has shown more flexibility, and that two-way fluctuations over the short term are normal. But in the long run, he reassured, the yuan will maintain its strength as a global currency.

The onshore yuan exchange rate set a two-year low in the midday trading session, and it triggered market speculation of a potential weakening to 7 against the US dollar – a key psychological level in the foreign exchange market.

“It is hard to speculate on a certain point in the exchange rate. The market should not bet on a specific level [in the yuan’s exchange rate],” Liu said. “We’d like to see a reasonably balanced and basically stable exchange rate.

“We don’t see one-sided depreciation. We have the strength to support the currency. I don’t think anything [disastrous] will happen, and we will not allow it to happen.”

Analysts said the yuan’s weakness has been further pressured by the dollar’s broad strength in global markets and a resurgence of coronavirus infections across the country.

Worries over widening disruptions to economic activity resurfaced after China’s southern tech hub of Shenzhen said it would adopt tiered anti-virus restrictions, starting on Monday, while the southwestern metropolis of Chengdu announced an extension of lockdown-related curbs.

“The PBOC sent a strong signal to defend the yuan exchange rate,” said Zhang Zhiwei, chief economist with Pinpoint Asset Management.

“This action shows that the PBOC is not willing to tolerate a sharp yuan depreciation against the US dollar, even though the recent movement in the exchange rate is driven by a broad appreciation of the US dollar against other currencies,” Zhang said, noting that the yuan’s “exchange rate hasn’t depreciated visibly against non-US$ currencies”.

Population, not yuan, to hurt China in fight with younger rivals for investment

China International Capital Corporation said in a report on Monday that the economic recovery will determine the yuan’s change in the coming months, and that the market will take further notice of any policies to address the property weakness and mitigate the disruptions caused by coronavirus outbreaks.

Yang Yinkai, vice director of the National Development and Reform Commission, said at the same press conference on Monday that the government will step up policy support for the second half of the year.

“It is vital to unveil economic policy in the third quarter. The second half is key to making up economic losses from the pandemic,” Yang said.

Before the market opening, the PBOC set the midpoint rate at 6.8998 per US dollar, 81 pips weaker than the previous fix of 6.8917. A rising number means the currency is weakening, relative to the dollar.

Monday’s fixing was 155 pips firmer than the Reuters estimate of 6.9153, marking the ninth-straight trading day that the PBOC set firmer-than-expected official guidance, and prompting many market watchers to speculate that there was an official effort to rein in excess yuan weakness.

“The pressure is being felt in the yuan, which fell for a sixth month in August and is continuing to fall against the dollar. That’s despite the best efforts of the PBOC, which continues to set the yuan fix stronger than markets expect,” said Craig Erlam, a senior market analyst with Oanda Global Corporation.

“To make matters worse, US President [Joe] Biden is reportedly weighing up measures to limit US investment in Chinese tech firms. The US is becoming increasingly hawkish toward China, and the latest move is another blow to its tech space.”

Liu said the yuan has depreciated 8 per cent this year due to the strengthening US dollar, but China’s currency still rose against other currencies.

“It is not a full-scale depreciation of the yuan,” Liu said, adding that cross-border capital flows are normal, and that the spillover effects from US monetary policy are controllable.

Chinese cities Shenzhen and Chengdu clip movement to curb Covid cases

The Shanghai Securities Journal said on Monday that the rapid strengthening of the US dollar index was the major factor for the weakening of the yuan, and it played down concerns of strong depreciation of the yuan.

The US dollar index has hit a two-decade high against its major trading partners. Liu said it has strengthened 14.6 per cent this year, while the yuan’s depreciation was 8 per cent – “the smallest compared with other non-US dollar currencies in the [Special Drawing Rights] basket”.

He said the Japanese yen weakened 17 per cent, followed by the sterling at 14 per cent and the euro at 12 per cent.

Additional reporting by Reuters