BUSINESS China to eliminate forex risk reserve requirement amid yuan’s rapid rise

BUSINESS

China to eliminate forex risk reserve requirement amid yuan’s rapid rise

Global Times

22:38, October 10, 2020

Photo:cnsphoto

China’s central bank announced Saturday to eliminate risk reserve requirements for financial institutions settling foreign exchange forward yuan positions, effectively lowering the cost for selling the Chinese currency amid the yuan’s recent rise against the US dollar.

Starting Monday, the reserve requirement ratio for settling forward forex sales will be cut to zero from the current 20 percent, the People’s Bank of China (PBC), the country’s central bank, said in a statement on its website, noting that the flexibility of the yuan’s exchange rate has strengthened and the foreign exchange market has been stable.

The PBC announced in August 2018 that banks must hold risk reserves equal to 20 percent of the foreign exchange forward positions of their clients in a move to stabilize major fluctuations in the yuan’s exchange rates at the time.

The move on Saturday came as the yuan has been on a rapid rise against the US dollar. On Friday, China’s onshore spot yuan ended at a 17-month high against the greenback, after its daily reference rate against the dollar was set at 6.7796, strengthening from 6.8101 on the previous trading day.

The yuan’s rapid rise was also underpinned by the economy’s resilience despite the still-raging pandemic outside of China. The nation’s yuan-denominated exports jumped 11.6 percent year-on-year to 1.65 trillion yuan ($246.46 billion) in August, while its imports edged down 0.5 percent to 1.23 trillion yuan, resulting in a surge of 74.4 percent in trade surplus, according to customs statistics.

In the statement, the PBC said that it will continue to maintain the flexibility of the yuan’s exchange rate, stabilize market expectations, and maintain the currency’s basic stability at a reasonable and balanced level.

The Chinese mainland’s onshore foreign exchange market is the fourth-largest in Asia, following Singapore, Hong Kong and Japan, DBS economists wrote in a recent research note sent to the Global Times. Trading volume in the mainland foreign exchange market, per DBS data, stood at 201 trillion yuan last year, with an average daily turnover of $136 billion.


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