The People’s Bank of China (PBOC) said it will reduce the foreign exchange risk reserve ratio for financial institutions purchasing foreign exchange through forward exchange contracts from 20% to zero, effective March 2. The adjustment essentially reverses a move from September 2022, when the central bank raised the reserve requirement to curb the rapid depreciation of the yuan and capital outflows.
In a statement cited by Reuters, the central bank said the move is aimed at supporting companies in managing exchange rate risks, while reiterating its commitment to keep the renminbi exchange rate at a reasonable and balanced level.
Market participants interpreted the move as a signal that policymakers are increasingly wary of the pace of appreciation. Yuan Tao, an analyst at Orient Futures, told Reuters the decision was unexpected and indicated that the PBOC considers the yuan’s recent rise to be too rapid, indicating some degree of intervention to smooth out volatility.
The yuan last year posted its biggest annual gain against the dollar since 2020, strengthening past the psychologically significant threshold of 7 per dollar. The upward momentum has continued into the beginning of this year, even as the dollar has remained largely stable.
The latest policy adjustment underlines Beijing’s delicate balancing act, allowing market forces to play a greater role in currency pricing while intervening when moves are seen as disorderly or inconsistent with broader economic objectives.
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