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

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

© Reuters. FILE PHOTO: The headquarters of the People's Bank of China, the central bank, is pictured in Beijing, China, February 3, 2020. REUTERS/Jason Lee/File Photo

SHANGHAI/SINGAPORE (Reuters) -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 declines.

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.

That would effectively free up $16.4 billion worth of foreign exchange with China's FX deposits standing at $821.8 billion at end-July.

The yuan bounced in both onshore and offshore trade to three-week highs after the news. The onshore yuan surged to a high of 7.2360 per dollar in the early Asian session, the strongest level since Aug. 11, before last fetching 7.2542 as of 0220 GMT.

The PBOC said its move was to "improve financial institutions' ability to use foreign exchange funds".

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. [CNY/]

"The FX RRR cut will help ease the yuan depreciation pressure, when the PBOC's fresh round of monetary easing is underway," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

"The cut will gain more policy room for further interest rate cut to stimulate the economy."

Cheung added that Friday's announcement reinforced the central bank's stance to defend a weakening yuan but was "unlikely to reverse the bearish picture of the yuan."

Friday's policy move also comes as China steps up efforts to support the yuan by persistently setting firmer-than-expected daily guidance and even asking some domestic banks to scale back their outward investments, as authorities grow increasingly uncomfortable with the currency's quickening slide.

The central bank in July adjusted a parameter to allow companies to borrow more overseas, so they could bring in foreign currency to be converted onshore, thereby supporting the yuan.

China's major state-owned banks were also seen repeatedly selling dollars in both onshore and offshore markets over the past months to stem rapid yuan losses.

The PBOC previously cut the FX reserve requirement ratio for financial institutions by 200 basis points in September 2022, in a bid to rein in a weakening yuan and make it less expensive for banks to hold dollars.