SHANGHAI (Reuters) – The Chinese central bank has ordered financial institutions to keep more foreign exchange in reserve, a move that analysts say could help moderate a rally in the yuan after the currency hit a three-year high on Monday against the dollar.
The People’s Bank of China (PBOC) reported that as of June 15, the foreign exchange reserve ratio for financial institutions has risen to 7% from 5%. The increase will make it more expensive for banks to hold dollars.
Banks in China have about $ 1 trillion in foreign currency deposits, some of which is export earnings and unconverted investment flows.
Analysts said the higher requirements would force banks to freeze more of those dollars, slowing the rate of appreciation of the yuan by deterring long-term inflows of dollars.
“The goal is to adjust the liquidity of foreign currency, raise foreign currency interest rates, to ease the upward pressure on the yuan,” said Shuang Ding, head of Greater China economic research at Standard Chartered.
In response to questions, the People’s Bank of China referred Guan Tao, a former senior official with China’s foreign exchange regulator, to Reuters.
Guan said that the PBOC’s use of the foreign exchange reserve ratio, a tool that it has used little in the past, “shows that the People’s Bank of China still has many elements at its disposal and has a lot of freedom to choose.
In the future, if speculative trading appears in the forex market, you have a constant supply of macroprudential tools at your disposal, “he added.
The announcement came after the yuan hit a three-year high against the dollar, following a series of warnings from Chinese officials against speculative bets on the currency.
A strong economic recovery and capital inflows have led the renminbi to post its biggest monthly gain against the dollar since August. Traders interpreted the PBOC midpoint daily pegs as an indication of the implicit approval of a strong yuan.
On Monday, the central bank raised the midpoint of the yuan to its highest level since May 17, 2018. The spot yuan can trade 2% on both sides of the daily fix.
The yuan ended its domestic session at 6.3607 units per dollar, its strongest close since May 15, 2018. The offshore yuan appreciated to a high of 6.3526 per dollar, also a three-year high, but fell to 6.3700 after the announcement of the reserve ratios.
(Reporting by Winni Zhou, Samuel Shen and Andrew Galbraith in Shanghai; additional reporting by Rong Ma in Beijing and Vidya Ranganathan and Tom Westbrook in Singapore; Edited in Spanish by Janisse Huambachano)
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