FX reserve ratio raised to rein in surging yuan

China’s central bank said yesterday that it will raise the FX reserve requirement ratio for financial institutions to 7 percent from 5 percent, effective on June 15, in a bid to combat speculation of yuan.

The People’s Bank of China said the move was meant to “strengthen FX liquidity management at financial institutions”, according to a statement published on its website.

That rise in reserve requirements would make it more expensive for banks to hold dollars and other foreign currencies. Dollar/yuan swap points fell to price indicating a firmer yuan in the near term as market participants braced for companies and banks to reduce dollar holdings.

As per latest data, banks in China hold about US$1 trillion (HK$7.8 trillion) in foreign currency deposits.

The last time the PBOC raised the reserve requirement was in 2007, from 3 percent.

The onshore yuan strengthened 47 basis points to 6.3607 per US dollar, a three-year high, though China signaled its tolerance for the yuan’s rally is fading.

Beijing fixed the reference rate at 6.3682 per dollar on Monday, versus the average estimate of 6.3656 in a Bloomberg survey.

The rise in the yuan is due to short-term speculation and probably won’t last, Sheng Songcheng, a former People’s Bank of China official told the state-run Xinhua News Agency on Sunday. The central bank-backed Financial News and an ex-regulator also weighed in.

The chorus of comments talking down the yuan follows a subtle shift in policy makers’ stance at the end of last week after earlier messaging appeared to indicate a greater tolerance for a stronger currency. A rapidly rising yuan may draw increased scrutiny in global financial markets, especially at a time when the dollar is losing momentum.

“PBOC seems comfortable with yuan’s direction, just not the pace of its gains that was spurred by speculations of the currency being used to curb imported inflation,” said Fiona Lim, senior currency analyst at Malayan Banking Berhad in Singapore. “The level of 6.20 is still possible over the next 12 months especially if broader dollar weakness takes the dollar-yuan pair to that level.”

The yuan will become a global reserve currency sooner than most people expect, billionaire investor Ray Dalio said in an interview with CNBC.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.