PBOC Cuts Forex Reserve Ratio to 6% as Yuan Declines 8% against Greenback

63

The Chinese central bank has reduced the forex reserve ratio for domestic financial institutions by 2 percentage points.

On 5 September the People’s Bank of China (PBOC) announced via its official website it would reduce the forex reserve ratio from 8% to 6% starting from 15 September, in order to raise the ability of Chinese financial institutions to make use of foreign exchange funds,

The move comes just as PBOC pointed to a near 8% depreciation in the value of the renminbi against the US dollar since the start of the year. The USD – CNY rate currently stands at around 6.9.

Guan Tao (管涛), chief global economist with Bank of China Securities, said to state-owned media that cutting the forex reserve ratio would have the effect of stabilising exchange rate expectations.

“This move by the central bank can release US dollar liquidity domestically, and narrow the negative spread domestically between the renminbi and the US dollar,” Guan said. “The use of macro-prudential measures can stabilise forex expectations.”

“The central bank is sending a positive signal to markets with this move,” said Wen Bin (温彬), chief economist with China Minsheng Bank.

“This is of benefit to stabilising renminbi exchange rate expectations and avoiding irrational over-adjustments.”