China central bank to cut forex reserve ratio to help limit renminbi weakness

SHANGHAI – China’s central bank said on Monday it will cut the amount of foreign exchange reserves that financial institutions must hold, a move seen as aimed at slowing the renminbi’s recent depreciation.

The People’s Bank of China (PBOC) said it would cut the foreign exchange reserve requirement ratio to 6 per cent from 8 per cent beginning Sept 15, according to an online statement.

The PBOC said the reduction aimed to improve “financial institutions’ ability to use foreign exchange capital”.

The move came after the Chinese renminbi’s recent slide to two-year lows. The currency has depreciated by 8 per cent against the United States dollar in the year to date, as a result of broad dollar strength in global markets and China’s worsening economic slowdown.

The reduction in reserve requirements would boost dollar liquidity. Based on end-July data, when foreign exchange reserves stood at US$953.7 billion (S$1.34 trillion), the lower requirements would free up around US$19 billion.

“It is not a huge amount compared with cross-border receipts,” said Ms Frances Cheung, rate strategist at OCBC Bank. “Still, the market is mindful of the signal the central bank sends.”

Both onshore and offshore renminbi briefly bounced about 200 pips following the PBOC statement and pared some of their earlier losses.

Some traders and analysts said the cut was expected and was partly a signal to the market that rapid declines in the renminbi would be unwelcome.

“As recent daily yuan midpoint fixings persistently came in stronger than market expectations, the PBOC’s official action to stabilise the yuan was already within market expectations,” said Mr Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.

The PBOC has been setting firmer-than-expected midpoint guidance rates over the past two weeks, with many market participants interpreting it as a sign of official efforts to rein in the renminbi’s weakness.

Major investment houses have cut their renminbi forecasts as its fall against the dollar has accelerated since mid-August, with some expecting a breach of the 7-per-dollar milestone before next month’s politically sensitive Party Congress despite the authorities’ efforts to slow the slide.

The PBOC last cut the foreign exchange reserve requirement ratio by 100 basis points in April, in a bid to rein in a sliding renminbi and make it less expensive for banks to hold dollars. REUTERS