PBOC raises the foreign-exchange reserve ratio to 6% to slow the yuan’s rally

The People’s Bank of China said on Tuesday it would raise the foreign-exchange reserve requirement ratio for financial institutions by 2 percentage points, to 6% from 4%^3,4. The change takes effect on 15 November, the central bank said in a statement^5,9.

The bank described the step as a move to strengthen the liquidity management of financial institutions⁹. In practice, it requires banks to hold a larger share of their foreign-currency deposits in reserve at the central bank, locking up more of their foreign currency, and it is expected to tighten onshore liquidity^2,9.

The measure was widely read as an effort to slow the yuan’s rapid appreciation^5,7. It was the latest step by the central bank to signal discomfort with the currency’s gains².

Market reaction

The onshore yuan ended its longest winning streak in three decades after the announcement⁸. The currency weakened on Tuesday, while other Asian currencies traded mixed and the South Korean won rebounded¹⁰.

Before the move, the central bank had set the official midpoint for the dollar against the yuan at 6.7150 for Tuesday’s session¹¹. The reserve decision then pushed the currency in the opposite direction to its recent run, as the statement on 3 November reached the market^5,8.

Why it matters to investors

Raising the ratio locks up more of the banks’ foreign currency at the central bank, and the aim, as the measure has been described, is to cool the yuan’s gains^2,6,9. The decision signals that Beijing prefers a slower pace of appreciation than the one markets had delivered^1,2.

The yuan had risen for longer without a break than at any time in three decades before Tuesday⁸. Ending that streak with a single administrative change shows how much influence the central bank retains over the onshore currency^1,8.

The effect also spread beyond China. Asian currencies traded mixed after the announcement, and the won rebounded as the yuan slipped¹⁰.

What to watch

The next markers are the daily midpoint fixings and how the onshore currency trades once the rule takes effect on 15 November^9,11. The central bank has framed the change as liquidity management⁹, while traders read it as a brake on the currency^2,10; the yuan’s path after the effective date will show how far the two readings coincide. This was the latest of several signals from the central bank about the pace of the currency’s gains².