BEIJING, Nov 3 (Reuters) – China’s central bank said on Tuesday that it will raise the amount of foreign currency that financial institutions must hold as reserves, a move aimed at tightening dollar liquidity conditions and slowing the pace of recent yuan gains.
The People’s Bank of China (PBOC) said it would raise the foreign exchange reserve requirement ratio (RRR) by 2 percentage points to 6% from 4%, effective on November 15, according to an online statement.
The decision to raise the ratio is “aimed at strengthening the management of foreign exchange liquidity in financial institutions,” the PBOC said.
The adjustment would result in an extra $24 billion being withdrawn from the financial system, according to a Reuters calculation based on official FX deposit data.
“The PBOC is responding to strong market-driven yuan appreciation,” said Marco Sun, chief financial market analyst at MUFG (China).
“By absorbing part of the available US dollar liquidity in the banking system, it is attempting to reduce the momentum behind yuan appreciation and prevent the market from developing excessive one-way expectations.”
The move would be a policy reversal of the PBOC’s decision in September 2023 to lower the FX RRR, which was a move to stem the yuan’s rapid losses and capital outflows.
The yuan has gained more than 5% against the dollar so far this year to become one of the best-performing Asian currencies. Its strength has been underpinned by robust exports, massive trade surpluses and heavy corporate FX conversion.
(Reporting by Liz Lee and Beijing newsroom; Editing by Jacqueline Wong and Thomas Derpinghaus)
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