China to Raise Foreign Exchange Deposit Reserve Ratio to 6%

The People's Bank of China (PBOC) announced on Tuesday that it will raise the foreign exchange reserve requirement ratio (RRR) for financial institutions by 2 percentage points, increasing the ratio from 4% to 6% effective November 15.

Policy Objectives and Market Impact

The PBOC stated the decision is "aimed at strengthening the management of foreign exchange liquidity in financial institutions."

According to a Reuters calculation based on official FX deposit data, the adjustment is expected to result in an extra $24 billion being withdrawn from the financial system. Following the announcement, the onshore yuan weakened as much as 0.37% against the dollar to a low of 6.6728 per dollar, while the offshore counterpart also followed the weakening trend.

Marco Sun, chief financial market analyst at MUFG (China), said the PBOC is responding to "strong market-driven yuan appreciation" and is attempting to "reduce the momentum behind yuan appreciation and prevent the market from developing excessive one-way expectations."

Economic Context

The yuan has gained more than 5% against the dollar so far this year, reaching its strongest level since 2022. This appreciation has been supported by robust exports, large trade surpluses, and heavy corporate foreign exchange conversion.

Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times that the adjustment could help ease upward pressure on the Chinese currency and prevent excessive exchange-rate swings. Xi Junyang noted that "a rapidly strengthening yuan could affect exporters, while large fluctuations in either direction could introduce instability into economic activity."

This move represents a policy reversal from September 2023, when the PBOC lowered the FX RRR to stem rapid yuan losses and capital outflows.

Regulatory Stance

PBOC Deputy Governor Zou Lan reiterated the central bank's stance at a financial forum in Hong Kong, stating, "China has promoted high-level opening-up and insisted that the market play a decisive role in the formation of the exchange rate."

In an October 8 statement, the PBOC emphasized that it does not set a preset exchange rate target level and does not intervene in long-term trends, but will use macroprudential measures to prevent "destructive overshooting of the exchange rate in the short term."

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Sources

• chinanews.com.cn (in Chinese): China's central bank decides to raise foreign currency deposit reserve ratio for financial institutions to 6%
• centraloregondaily.com: China to raise FX reserve requirement to slow yuan's rally | Consumer | centraloregondaily.com
• wixx.com: China to raise FX reserve requirement to slow yuan’s rally | 101 WIXX | Your Hit Music Station
• finance.biggo.com: China's Central Bank Raises FX Deposit Reserve Ratio to 6%; RMB Weakens, Tightening Dollar Liquidity — BigGo Finance
• globaltimes.cn: China's central bank raises forex reserve requirement ratio to 6% amid yuan's gains; move could help curb excessive market swing: expert - Global Times

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.