EconomyChina revives currency risk reserve requirement

China revives currency risk reserve requirement

China ‘s central bank said on Monday it would restore currency risk reserves for some forward contracts, a move that would make it more expensive to bet against the yuan in order to slow the pace of its recent depreciation.

The People’s Bank of China (PBOC) said it will raise foreign exchange risk reserves for financial institutions when they buy currencies through forward contracts to 20% from the current zero, starting on September 28.

The move to resume foreign exchange risk reserves would actually raise the cost of shorting the yuan at a time when the local currency is facing renewed downward pressure, according to traders and analysts.

The yuan has been hit by a combination of a strong dollar, a faltering Chinese economy and a more expansive monetary stance adopted by the authorities to prop up growth.

The Chinese currency’s decline has accelerated after the PBOC lowered key interest rates in August to widen the distance of its monetary policy skew from other major economies that are aggressively raising rates.

The yuan has tumbled more than 4% against the dollar since mid-August, to above the psychological level of 7 per dollar, and is on track to suffer its biggest annual loss since 1994, when China unified official exchange rates. and market.

The spot yuan was barely moving after the announcement. The yuan in local markets was trading at 7.1450 per dollar, compared to a close of 7.1298 on Friday.

China’s central bank removed risk reserve requirements in October 2020, when the yuan rose sharply.

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