China’s central bank said it will raise the amount of foreign currency financial institutions must hold in reserve, aiming to tighten dollar liquidity and moderate the yuan’s recent appreciation.
The People’s Bank of China (PBOC) will increase the foreign exchange reserve requirement ratio by two percentage points, from 4% to 6%, effective November 15. The bank said the change is intended to strengthen the management of foreign exchange liquidity at financial institutions.
A Reuters calculation based on official foreign exchange deposit data estimated that the move would withdraw an additional $24 billion from the financial system. MUFG China chief financial market analyst Marco Sun said the PBOC was responding to strong market-driven yuan appreciation and seeking to limit one-way expectations by absorbing some US dollar liquidity from banks.
The yuan has risen more than 5% against the dollar so far this year, making it one of Asia’s best-performing currencies. Its gains have been supported by robust exports, large trade surpluses and increased foreign currency conversion by companies.
The increase reverses the PBOC’s September 2023 decision to lower the foreign exchange reserve requirement, which was intended to curb rapid yuan losses and capital outflows.
Sources: Investing.com News.