Offshore yuan drops after China raises banks’ foreign reserve ratio


(Bloomberg) – The offshore yuan fell to its lowest level this month after China forced banks to hold more foreign currency in reserve for the second time this year, its biggest move yet to curb the surge of the yuan.

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Financial institutions will be required to hold 9% of their currencies in reserve from Dec. 15, the central bank said in a statement Thursday evening Beijing time, an increase of 2 percentage points. Earlier today, the People’s Bank of China signaled a limit to its tolerance for recent advances by setting its benchmark rate lower than expected.

The move prompted the offshore yuan to drop to 6.3839 on Thursday, the lowest since November 30. Little changed at 6.3783 at 8:12 a.m. in Hong Kong. It came a day after the yuan hit its highest level against the dollar since May 2018, supported by strong inflows from robust exports and foreign investment in onshore bonds. On a trade-weighted basis, the yuan hit its highest level since 2015, according to China’s Foreign Exchange Trading System.

The rising reserve ratio, which the PBOC says will help liquidity management, effectively reduces the supply of dollars and other onshore currencies – putting pressure on the yuan to weaken. This is the second increase this year, after the central bank raised the ratio by 2 percentage points in June, the first increase since 2007.

Analysts doubt the rise alone was enough to weaken the yuan too much as the onshore market is inundated with dollars. Foreign currency deposits have jumped 15% this year to a record $ 1 trillion, thanks to trade and investment flows. While the foreign reserve ratio in June briefly halted the yuan’s rise against the dollar, the trade-weighted basket has since strengthened by around 5%.

“A 2% increase in reserve requirements for foreign currency deposits is unlikely to make any significant change to the abundant US dollar liquidity on land, but it sends a clear sign that the PBOC is hampered by the recent yuan surge and wants curb its appreciation. ”, Tao Chuan, chief macro analyst at Dongwu Securities. “The advance of the Yuan could also hurt China’s competitiveness in exports if more countries reopen next year. These should be the reasons why the PBOC steps in to send a clear warning. “

“However, China’s trade surplus is still huge and onshore dollar liquidity is still plentiful, it’s hard to see the yuan weakening much in the short term,” he said. “The central bank may continue to take more steps to lower the yuan and reduce radical bullish bets on the yuan.”

Policymakers had previously been more quiet amid the rally in the yuan, avoiding direct intervention in the currency market. Instead, the PBOC chose to ease appreciation pressure by discouraging Chinese companies from borrowing foreign currency abroad and opening more channels for local residents to invest abroad. In September, authorities launched a bond connection platform to allow Chinese investors to buy foreign debt in Hong Kong.

In recent months, the PBOC has pegged the yuan price slightly lower than analysts expected and has repeatedly warned against currency volatility. The PBOC on Thursday set the fixing at 6.3498 to the dollar, making it lower than the average estimate from a Bloomberg survey of analysts and traders since mid-October. The fixing limits the movement of the yuan by 2% on each side.

Ming Ming, head of bond research at Citic Securities, expects the extent of the yuan’s correction to be limited in the near term. The strong seasonal demand for forex settlement at the end of the year makes it difficult for the PBOC to curb the yuan surge, he said.

(updates with prices in the third paragraph and Citic comments in the 10th paragraph)

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