China eyes firmer yuan as it eases up on banks’ cash requirements, in fresh bid to prop up economy
- People’s Bank of China will cut the reserve requirement ratio for foreign-exchange deposits from 6 to 4 per cent from September 15
- Cutting the foreign-exchange ratio is one of the tools Beijing can use to defend yuan, and the move is expected to release US$16 billion into the market
In a bid to curb one-sided bets against the yuan, China’s central bank has reduced the amount of money that financial institutions must set aside in reserve – freeing up more money to be loaned out as Beijing ramps up efforts to inject more life into the ailing economy.
The reserve requirement ratio (RRR) for foreign-exchange deposits will be cut from 6 per cent to 4 per cent from September 15, the People’s Bank of China (PBOC) said on Friday.
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The cut will “increase the ability of financial institutions to use their forex funds”, the central bank explained.
The move, which had been widely expected, sent a strong signal to the market that Beijing is moving to stem one-sided bets against the yuan.
“This amount is insignificant by itself from a liquidity and USD rates prospective. But more important is the signalling impact – such countercyclical measures never come as singular policies, and the move reaffirmed the PBOC’s decisive stance to curb further weakness of the [yuan] in the foreseeable future,” Becky Liu, head of China Macro Strategy with Standard Chartered, said in a research report on Friday.
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 risks.
The Chinese currency weakened past 7.3 per US dollar last month – the lowest level since the global financial crisis in 2008. A higher number of yuan per single US dollar represents a weakening yuan.
Cutting the foreign exchange ratio is one of the tools Beijing can use to defend the yuan.
The RRR slash also came amid Beijing’s ratcheted-up efforts to boost the ailing economy this week, but a substantial turnaround in the yuan’s strength relies largely on a solid economic recovery, according to economists.
In hopes of unleashing consumption potential and motivating people to buy homes, Beijing announced cuts in the minimum down-payment requirements and mortgage rates for purchases. This comes against the backdrop of a deepening property crisis that has been a major drag on the national economy.
“These could lead to a stabilisation, or even small rebound, of economic growth in the months ahead,” said Liu with Standard Chartered, who expected bets against the yuan to become increasingly unattractive, and that there could be “a turning point in market sentiment” regarding the yuan-dollar exchange rate before year’s end.
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The offshore yuan exchange rate rose by 200 basis points to above 7.26 per US dollar soon after the announcement on Friday. In the onshore market, it closed the day at 7.2615 against the dollar, compared with the closing price of 7.2872 on Thursday.
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.
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.
