The People’s Bank of China on Monday said it will impose a risk reserve requirement of 20% on banks’ foreign-exchange forward sales to clients. That’s after the yuan depreciated on Friday to a level closest to the weak end of its allowed trading band since a shock currency devaluation in 2015.
Pressure on the exchange rate has worsened lately due to the dollar’s surge and as the local economy suffers from Covid curbs and slowing property sector.
The yuan extended losses Monday and its depreciation past 7.1854 per dollar would send it to the weakest level since early 2008. PBOC’s attempt to support the currency comes on top of stronger-than-expected yuan fixings since August, which limits the currency’s moves by 2% on either side.
It also reduced in banks’ foreign-currency reserve requirements earlier this month to boost the yuan.
“By imposing the risk reserve requirement, the PBOC aims to slow the pace of depreciation but it will unlikely turn the tide,” said Peiqian Liu, an economist at NatWest Markets. “The currency weakness is in line with most major currencies and the broad dollar strength.”
The additional risk reserve requirements would make it expensive for traders to buy foreign-exchange through forwards or options, a move that may curb bearish yuan bets. The central bank had lifted the risk reserves for foreign-exchange forward trading from zero to 20% in 2015, before lowering it two years later and raising it again in 2018.
The PBOC also set the yuan fixing weaker than 7 per dollar on Monday for the first time since 2020. Liu sees this as a clear signal that the PBOC doesn’t intend to defend any specific yuan levels.
Liu Guoqiang, deputy governor of the PBOC said earlier this month that the central bank won’t allow the trend of a “reasonable, equilibrium and basically stable” exchange rate to be changed while warning traders against betting on a certain level for the yuan.
Onshore yuan fell 0.5% to 7.1651 per dollar as of 11.43am local time. It was trading at a level that’s about 1.9% weaker than the fixing of 7.0298 per dollar.
China is not alone in resisting the ceaseless pressure from the dollar in the region. Japan intervened to prop up the yen for the first time since 1998, while India’s efforts to protect the rupee are shrinking currency reserves at a rate that’s poised to eclipse the drawdown during turmoil a decade ago. The British pound plunged 4.7% Monday to a record low, adding to the dollar’s strength.
The PBOC has more policy tools at hand to defend the currency, Jingyang Chen, a foreign exchange strategist at HSBC Holdings Plc said. “We haven’t seen a lot of signs of meaningful intervention,” Chen said in an interview on Bloomberg Television.
“If we saw a quick fall in trade-weighted yuan, then we might see more direct intervention or another cut to the foreign exchange reserve ratio,” she said.