BUSINESS Risk reserves raised to support yuan

BUSINESS

Risk reserves raised to support yuan

Shenzhen Daily

07:37, September 27, 2022

CHINA’S central bank yesterday announced steps to slow the pace of the yuan’s recent depreciation by making it more expensive to bet against the currency.

The People’s Bank of China said it would raise the foreign exchange risk reserves for financial institutions when purchasing foreign exchange through currency forwards to 20% from the current zero, starting Sept. 28.

In explaining its actions, the central bank said it is “stabilizing foreign exchange market expectations and strengthening macro prudential management,” according to an online statement.

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

“The move will make the cost of forward dollar buying more expensive,” said a trader at a foreign bank.

“So, the effect of the policy move may be more powerful than verbal guidance and signal through midpoint fixing settings.”

Spot yuan hardly budged on the announcement. The onshore yuan traded at 7.1485 per U.S. dollar, versus the previous late night close of 7.1298 Friday. Its offshore counterpart briefly bounced to 7.13 before last fetching 7.1522 in moring trading yesterday.

Earlier yesterday, the central bank again set firmer-than-expected official guidance for the 23rd straight trading session, at 7.0298 per dollar before market opening, the weakest level since July 7, 2020.

Over recent months, authorities have stepped up efforts to rein in yuan weakness through persistently setting firmer-than-expected midpoint fixings, verbal warnings and holding off immediate easing moves.

The yuan has slumped more than 4% to the dollar since mid-August to breach the psychologically important 7 per dollar level, and is on course for its biggest annual loss since 1994, when China unified official and market exchange rates.

The Chinese currency has been hit by a combination of broad dollar strength, China’s slowing economy and an easier monetary bias adopted by authorities to prop up growth.

The downturn in the yuan has picked up speed after the central bank lowered key interest rates in August to further widen its policy stance from other major economies that are raising rates aggressively.

Yesterday’s announcement by the central bank marks the latest policy measure to stem the faltering currency after earlier this month it moved to lower the amount of foreign exchange that financial institutions must hold as reserves earlier.

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

The yuan is among a swathe of currencies facing relentless selling pressure as the dollar enjoys broad demand, underpinned by the U.S. Federal Reserve’s rapid monetary tightening.

In Japan, where the central bank is sticking to ultra-easy policy to revive a fragile economy, authorities last week intervened in the currency market to buy yen for the first time since 1998.

(SD-Agencies)

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