China has lowered the foreign currency reserve ceiling to strengthen the yuan

The move should increase the supply of foreign currencies, thus making the yuan more attractive to buy

Photo: Bloomberg LP

China cut the amount of foreign currency bank deposits lenders must set aside as reserves for the second time this year to boost the yuan after the currency’s value hit a two-year low, Bloomberg reported.

The foreign currency reserve requirement for banks will be lowered to 6% effective September 15 from the current 8%, the People’s Bank of China said on Monday.

The move is expected to increase the supply of foreign currencies, thereby making the yuan more attractive to traders.

The yuan fell as concerns about tightening US monetary policy and a deepening energy crisis in Europe supported the greenback. And while a series of stronger-than-expected fixings by China’s central bank have slowed the yuan’s slide, banks including Goldman Sachs Group Inc. still expect it to fall as low as 7 yuan to the dollar as concerns over new coronavirus measures in some parts of the country, problems in the real estate sector also put pressure on economic growth.

“The People’s Bank of China has sent a strong signal to protect the yuan exchange rate,” said Juwei Zhang, senior economist at Pinpoint Asset Management Ltd. “This action shows that the regulator is unwilling to tolerate a sharp depreciation of the yuan against the US dollar,” he added.

In an address shortly before the announced reduction of the foreign currency deposit ceiling, the central bank’s deputy governor, Liu Guoquan, told reporters in Beijing that China had succeeded in keeping the yuan at a stable level.

The yuan slowed its decline in value after the central bank’s decision. The domestic yuan fell 0.4 percent against the US currency to 6.9311 yuan per dollar, while China’s foreign currency fell to 6.94 yuan per dollar.

“The decline reflects the People’s Bank of China’s decision to slow the pace of yuan depreciation, but is unlikely to reverse course,” said Ken Chun, currency strategist at Mizuho Bank Ltd. “The action was partly expected after a series of stronger yuan fixings and the impact should be weak,” he adds.

The central bank last cut the amount of foreign currency deposit reserves in April, when the yuan’s value fell more than 4 percent in response to Shanghai’s coronavirus measures. The yuan, used locally, depreciated 2.2 percent against the dollar last month and is on track for a seventh straight month of losses.

Chinese financial institutions held $953.6 billion in foreign currency deposits as of July, down from a record $1.1 trillion. dollars in February. Stockpiles have served as a buffer for the yuan amid economic headwinds. The Chinese currency is still around the levels seen in December, according to the CFETS RMB index.

The People’s Bank of China’s decision to reduce the size of banks’ questionable deposits is likely to add $20 billion of foreign currency to the market, which is not much, said Zhaopen Xin, senior strategist at Australia & New Zealand Banking Group. He does not expect a further contraction of the size of these deposits.

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Tags: China lowered foreign currency reserve ceiling strengthen yuan

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