China to raise reserve requirement for forward forex trading to 20%

BEIJING - China will elevate the foreign exchange risk reserve ratio for forward-forex sales to maintain the supply-demand balance in the country's forex market and stabilize the yuan exchange rate.

The ratio is set at 20 percent, up from zero, effective from Wednesday, said the People's Bank of China (PBOC) in an online statement on Monday. The PBOC slashed the rate from 20 percent to zero in October 2020.

Monday's move aims at stabilizing forex market expectations and strengthening prudent management at the macro level, said the statement.

The move will help dampen demand for forward-forex purchases by pushing up the costs, thereby subduing yuan weakening, said Dong Ximiao, chief researcher with Merchants Union Consumer Finance Company Limited.

Affected by factors, including the US Federal Reserve's rate hikes, the currencies of many economies (including the Chinese yuan) have weakened against the US dollar.

The yuan's central parity rate weakened 378 pips to 7.0298 against the US dollar Monday, said the China Foreign Exchange Trade System.

The recent yuan depreciation against the US dollar is passive, triggered by the surge in the US dollar index, and proportionate to how much the greenback has strengthened, said Wang Qing, an analyst with Golden Credit Rating.

The move followed a 2-percentage-point cut in the foreign exchange reserve requirement ratio for financial institutions starting from Sept 15, a positive signal to the market of keeping the exchange rate stable.

Industry insiders say these measures will help manage expectations of short selling and prevent freefall of the yuan in the near term, while in the medium to long-term, the yuan exchange rate hinges on economic fundamentals.

"There is no ground for the yuan to weaken for long," said Wen Bin, chief economist at China Minsheng Bank.

The expected upturn of the economic growth rate in the third quarter, tamed inflation, and stability in the balance of payments will help render the yuan exchange rate and the forex market stable, said Wen.

China's central bank said it would continue to promote the use of the yuan in international trade and investment and advance financial opening. It said it would also deepen currency cooperation with other central banks and nurture offshore yuan markets, noted the latest report on yuan internationalization.