China’s central bank announced on Friday a cut to the amount of foreign exchange deposits that financial institutions must hold as reserves by 2 percentage points, in the latest move to support yuan exchange rate.
The required reserve ratio for foreign exchange deposits would be cut from 6 to 4 per cent from September 15, the People’s Bank of China said.
The change will reduce the ratio to the same level as seen in 2006.
Yuan’s future bright, says Beijing, depreciation down to ‘short-term pressure’
Yuan’s future bright, says Beijing, depreciation down to ‘short-term pressure’
The cut would “increase the capability of financial institutions to use their forex funds”, the central bank explained.
The yuan exchange rate has been under pressure in recent months as the world’s second-largest economy has lost steam, while property woes and local debt stress have fanned widespread fears that there could be an outbreak of increased financial risk.
The Chinese currency weakened past 7.3 per US dollar last month, the lowest since the global financial crisis in 2008.
Advertisement
Cutting the foreign exchange ratio is one of the tools Beijing can use to defend yuan.
The offshore yuan exchange rate rose by 200 basis points to above 7.26 per US dollar soon after the announcement on Friday.
Chinese authorities have long claimed that they have many tools to maintain the basic stability of the yuan, while they also hope that a flexible currency can help absorb external shocks.
The yuan midpoint, a daily reference rate set by China’s central bank, was set at 7.1788 against the US dollar on Friday, stronger than Thursday’s fixing of 7.1811.
Advertisement
The previous foreign exchange ratio cut of 2 percentage points was announced in September 2022 after it was as high as 9 per cent in December 2021.
China’s outstanding foreign exchange deposits fell to US$821.8 billion at the end of July, down by 13.8 per cent from a year earlier.
Advertisement
