China Makes First Foreign Reserve Ratio Hike in Over a Decade, Central Banks Weigh In on Dollar Dominance and Yuan Takeover

[xizhimen]

China Makes First Foreign Reserve Ratio Hike in Over a Decade​

Tuesday, 1 June 2021 11:41

• Central Banks Weigh In on Dollar Dominance and Yuan Takeover

Chinese authorities increased the required reserve ratio for the first time in 14 years in an effort to curb yuan appreciation.

China has upped the required reserve ratio (RRR) for foreign currency deposits from 5 percent to 7 percent, according to a statement from the People’s Bank of China (PBoC), effective from June 15.

This marks the first foreign exchange RRR hike since May 2007 after the yuan experienced appreciation following reforms in 2005.

Yuan Strength

The Chinese yuan has been significantly strengthening as of late, rising against the dollar to a three-year high to break the 6.40 USDCNY level last week.

And last Thursday, an ad-hoc meeting was organized by the PBoC and other government bodies with major FX market players.

The central bank issued a statement following the meeting that said the yuan exchange rate «can’t be used as a tool to stimulate exports via depreciation nor to offset impact of rising commodity prices via appreciation».

Market-Driven Yuan

On Monday, PBoC deputy governor Liu Guoqiang also stated that two-way fluctuation of the yuan will become the norm and that the exchange rate in the future will be dependent on market supply and demand alongside developments in the international market.

Despite the financial regulator’s commitment to a more non-interventionist future, Chinese authorities remain active in the market, especially with regards to assets with high price volatility.

Last month, the PBoC increased efforts to crack down on crypto trading and mining while more recently, China’s banking regulators told lenders to stop selling investment products linked to commodity futures to mom-and-pop buyers, according to a «Reuters» report, and unwind existing books for these products.

China Makes First Foreign Reserve Ratio Hike in Over a Decade

Chinese authorities increased the required reserve ratio for the first time in 14 years in an effort to curb yuan appreciation.

www.finews.asia

 

[xizhimen]

China Takes Its Most Visible Measure Yet to Curb Yuan’s Gain

 

[xizhimen]

China's central bank tries to stop surge in currency's value​

FILE - In this Nov. 12, 2015, file photo, staff member displays an 100-yuan RMB banknote at the Bank of China Tower in Hong Kong. Chinas central bank is trying to restrain the surging exchange rate of its currency, temporarily backtracking in efforts to make the tightly controlled yuan more flexible and market-oriented. (AP Photo/Kin Cheung, File) (Copyright 2021 The Associated Press. All rights reserved.)

June 1, 2021 12:12 am

BEIJING – China’s central bank is trying to restrain the surging exchange rate of its currency, temporarily backtracking in efforts to make the tightly controlled yuan more flexible and market-oriented.

On Monday, commercial lenders were ordered to hold more of their foreign currency as reserves in the central bank to limit sales after the yuan hit a four-year high of 6.3674 to the U.S dollar.

The People’s Bank of China is trying to deter speculators after the yuan rose by about 12% against the dollar since May.

The ruling Communist Party said in 2015 it planned to make the yuan a “freely tradable and freely usable currency” by last year. But it has kept controls in place due to concern about swings in the exchange rate and the flow of money into and out of the world’s second-largest economy.

“It looks as if the PBoC still wants to stick to the idea of exchange rate liberalization,” said Iris Pang of ING in a report.

“But this is difficult to achieve if the PBoC doesn’t like speculators,” Pang said. “A market consists of FX users and investors, including speculators.”

Monday’s order raised the amount of their foreign currency reserves banks must keep on deposit with the PBoC from 5% to 7%. That change, the first since 2007, will lock up about $20 billion of their $1 trillion in foreign currency, according to Macquarie Group.

The increase is a “strong signal” that policymakers are “increasingly uncomfortable” with the speed of the yuan’s rise, Macquarie said in a report.

The surge in the yuan's value threatens to make China's goods more expensive in foreign markets, hampering a manufacturing revival following last year's slump.

A stronger yuan would make imported oil, iron ore and other raw materials cheaper for Chinese manufacturers following a rise in global commodity prices. But Monday's order suggested regulators are less worried about that than about financial stability.

In 2017, the central bank tightened controls on trading to stop a fall in the yuan’s value after a change in the mechanism used to determine its state-controlled exchange rate set off a flurry of selling.

China's central bank tries to stop surge in currency's value

China’s central bank is trying to restrain the surging exchange rate of its currency, temporarily backtracking in efforts to make the tightly controlled yuan more flexible and market-oriented.

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