People’s Bank of China Cancels 20% Forex Risk Reserve Ratio for Forward Settlement

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The central bank has announced that starting from 11 September a 20% reserve requirement will no longer be imposed upon the domestic deposits of banks participating in offshore RMB business.

In August 2015 the People’s Bank of China released its “Notice on the Strengthening of Macro-prudential Regulation of Forward Forex Sales” (关于加强远期售汇宏观审慎管理的通知). requiring that financial institutions provide a forex risk deposit when engaging in forward forex sales on behalf of clients, which was temporarily set at 20%.

The following year China’s central bank began to apply standard reserve policies to the deposits of overseas financial institutions placed with domestic financial institutions, in order to curb pro-cyclical cross-border capital flows.

PBOC has since reversed course with the issuance of the “Notice on Adjustment to the Reserve Policy for Deposits Made with Domestic Agency Banks by Banks Participating in Offshore RMB Business,” which reduces the forex risk reserve ratio from 20% to zero starting from 11 September.

Speaking to Reuters, Helena Huang, China economist as ICBC Standard Bank, said the move will serve to greatly reduce the cost of yuan forward trading activities, and is significant of an ongoing trend towards forex deregulation.

“Banks will soon no longer need to set aside any additional RMB capital when trading FX forward for their clients in the offshore market,” said Huang.

‘In essence, this is a strong and positive FX de-regulation move that arrives at the right moment to reinvigorate the offshore CNH market.”

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