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China raises foreign-currency deposit reserve ratio to 6 per cent

China’s central bank will raise the share of foreign-currency deposits that banks must hold in reserve from 4 per cent to 6 per cent on 15 November. Reuters calculated that the change could absorb about 24 billion dollars. The yuan fell after the announcement, following a rise of more than 5 per cent against the dollar this year.

Economics & Markets··Morning
Close detail of the stone and metal entrance of China’s central bank in Beijing, with a small Chinese flag farther along the facade.

Banks must hold more foreign currency at the central bank

China’s central bank will raise the reserve requirement on foreign-currency deposits from 4 per cent to 6 per cent on 15 November. Banks must deposit that share of their foreign-currency holdings with the central bank. The announcement came on 3 November. The measure concerns the yuan’s foreign-currency market.[1], [2]

The central bank described the change as strengthening foreign-currency liquidity management. Reuters calculated from official deposit data that the higher ratio would absorb about 24 billion dollars from the financial system. In September 2023, the central bank had cut the same requirement while trying to restrain yuan depreciation and capital outflows.[1]

The yuan weakens after a sustained rally

The onshore yuan, following the announcement, fell as much as 0.37 per cent against the dollar to 6.6728 per dollar, its weakest level since 23 October. This was an intraday observation. The offshore yuan also weakened. The currency had gained more than 5 per cent against the dollar since the start of the year, supported by exports and companies converting foreign-currency receipts.[1]

Analysts differ on whether the measure can change the trend

Marco Sun, a financial-market analyst at MUFG, said absorbing dollar liquidity could curb expectations of one-way yuan appreciation. Zhaopeng Xing, a China strategist at ANZ, considered the move largely symbolic because excess dollar supply remained substantial. The central bank also set its daily midpoint at 6.7150 per dollar, weaker than market expectations.[1]

References

  1. News sourceReutersChina raises foreign currency deposit reserve ratio to 6 per cent↩1↩2↩3↩4
  2. News sourceCaixin GlobalChina raises banks’ foreign-exchange deposit reserve requirement↩
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