China will raise the foreign exchange reserve requirement ratio to 6% from 4% on November 15. The move targets the yuan's rally, and analysts quoted by Reuters doubt it will reverse the currency's upward trend.
The People's Bank of China (PBOC) will raise the foreign exchange reserve requirement ratio by 2 percentage points to 6% from 4%, effective November 15. Reuters describes it as one of the strongest moves to slow the pace of a long rally in the yuan. The onshore yuan weakened as much as 0.37% against the dollar to 6.6728 per dollar after the announcement.
What the PBOC said and what it removes
The central bank explained its decision in a statement. According to the PBOC: "aimed at strengthening the management of foreign exchange liquidity in financial institutions". The adjustment would result in an extra $24 billion being withdrawn from the financial system, according to a Reuters calculation based on official FX deposit data.
The decision reverses course. It would be a policy reversal of the PBOC's September 2023 decision to lower the FX RRR, a move meant to stem the yuan's rapid losses and capital outflows.
Why the yuan keeps climbing
The yuan has gained more than 5% against the dollar so far this year, reaching its strongest level since 2022. Robust exports, big trade surpluses and heavy corporate FX conversion have underpinned the strength, Reuters reports.
Marco Sun, chief financial market analyst at MUFG (China), said the PBOC is responding to strong market-driven yuan appreciation. However, market participants do not expect the move to reverse the yuan's upward trend. Zhaopeng Xing, senior China strategist at ANZ, said the move was likely to carry greater symbolic significance and would not be enough to ease the oversupply.
The PBOC also lowered its midpoint rate for a second day in a row to 6.7150 per dollar, 661 pips weaker than a Reuters estimate. That is its largest weak-side deviation since September 10.
Source: Investing.com
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