(Bloomberg) — China moved to limit the drop in the yuan by cutting the amount of money that banks need to have in reserve for their foreign currency holdings.
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The move came after the yuan dropped to the lowest level against the dollar in 17 months in reaction to a small but growing Covid-19 outbreak in Beijing. Financial institutions will need to hold 8% of their foreign exchange in reserve starting May 15, the People’s Bank of China said in a statement Monday, lower than the current level of 9%.
Read more: Yuan Plunges 1% for Second Day as China Covid Outbreak Worsens
The cut is aimed at “increasing banks’ capabilities of forex fund use” and will help liquidity management, the central bank said in the statement. The change would increase the supply of dollars and other currencies onshore and relieve the yuan’s weakness.
This follows two hikes last year when the central bank was trying to limit a strong currency, the opposite of the situation now. The offshore yuan retreated from 6.6092 after the announcement, the weakest levels since November 2020, with its daily loss against the dollar narrowing to 0.8% from 1.3%.
The move reduces the attractiveness for banks to hold foreign currency and will likely dampen the pace of the move higher in the dollar-yuan pair, said Mitul Kotecha, strategist at TD Securities in Singapore.
Still, it is worth noting that the move only partly reverses the 2 percentage point hike in the reserve ratio in December last year, so the impact could be less significant unless it is followed by other measures including tightening liquidity or actual yuan-buying intervention, he added.
The Chinese yuan has been the worst performer against the dollar among Asian peers in the past five days with a 3% loss, in sharp contrast with its outperformance as the best regional currency gainer in the past two years, according to Bloomberg data.
Banks including JPMorgan Chase & Co. and BNP Paribas SA, slashed their quarterly forecast for the currency last week, as the yuan is seen increasingly dragged down by broadening Covid disruptions that threaten the nation’s growth outlook, and an inversion of China-U.S. interest rates that has stoked fear of capital outflows.
China is able to accommodate the impact of the Fed’s interest rate hikes, a senior foreign exchange official said last week, reiterating that the yuan movements have been “stable and healthy.”
(Updates with details in the last four paragraphs)
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2022-04-25 13:10:09
