PBOC Lifts Forex Reserve Ratio as Renminbi Appreciates Rapidly

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The Chinese central bank has raised the foreign exchange reserve ratio for the purpose of “strengthening forex liquidity management for financial institutions.”

The People’s Bank of China (PBOC) announced on 9 December that starting from 15 December it would increase the foreign exchange reserve ratio for Chinese financial institutions by 2 percentage points, to 9% from 7% previously.

Observers say the move is intended to ease recent rapid appreciation of the renminbi by forcing Chinese banks to hold a greater volume of foreign currency.

The yuan has risen over 2% against the greenback since late July, hitting its highest levels in trade-weighted terms since the end of 2015.

The move coincides with PBOC decision to reduce the reserve ratio for the renminbi deposits of Chinese banks by 50 basis points, potentially freeing up 1.2 trillion yuan in long-term funds.

The two decisions would imply that Chinese authorities are concerned about waning growth prospects in 2022, as global markets continue to face uncertainty in relation to the COVID-19 pandemic.

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