China to cut banks’ FX reserve ratio to rein in yuan weakness

SHANGHAI/SINGAPORE: China’s central bank said on Friday it will cut the amount of foreign exchange that financial institutions must hold as reserves for the first time this year, a move seen aimed at slowing the pace of recent yuan depreciation.

The People’s Bank of China (PBOC) said it would cut the foreign exchange reserve requirement ratio (RRR) by 200 basis points (bps) to 4% from 6% beginning Sept. 15, according to an online statement.

The move was to “improve financial institutions’ ability to use foreign exchange funds,” the PBOC said.

The FX RRR cut should also lower dollar funding costs in the interbank market and alleviate the downward pressure on the yuan, traders and analysts said.

But they added that the move was unlikely to reverse the downward trend of the yuan, seeing it as more of signal to markets that it was planning to lean harder against rapid yuan losses if needed.

The yuan is one of the worst-performing Asian currencies this year, down about 5% against the dollar amid a sharp slowdown in China’s economy and widening yield differentials with the United States. – Reuters