Forex Risk Reserve Ratio up to 20%

A pedestrian walks past the PBOC headquarters in Beijing. [JIANG QIMING/CHINA NEWS SERVICE]

Observers say PBOC rise will ease US dollar pressure on RMB and stabilize market

The People’s Bank of China, the country’s central bank, announced on Monday before the start of operations that it had raised the foreign exchange risk reserve ratio for forward transactions from 0% to 20%, effective Wednesday.

The rise, experts say, will help ease the downward pressure exerted by a stronger US dollar on the Chinese renminbi, in addition to stabilizing the currency market in general.

In early trading on Monday, the offshore renminbi’s exchange rate against the US dollar fell to 7.16, but rebounded 300 basis points after the PBOC announcement.

The foreign exchange risk reserve adjustment was introduced by the PBOC in August 2015. The implementation from Wednesday will mark the fifth time that the PBOC has used this counter-cyclical tool. The ratio would be lowered when the renminbi shows excessive appreciation; it would be increased when the currency depreciated too much.

In other words, if a bank’s forward currency sales were $10 billion last month, it would have to keep $2 billion in foreign exchange reserves with the PBOC this month, according to the last adjustment.

The PBOC will return this sum one year later. The bank does not need to return this amount for the period before the adjustment.

Wu Chaoming, deputy director of the Chasing International Economic Institute, said the amount of reserve held with the central bank is not being repaid with interest, which will reduce the supply of capital that may aim to short the rate. exchange rate of the renminbi.

The quotation for forward currency purchases will also be high, which will increase the costs of such purchases and limit demand, he said.

For the second time in recent weeks, the PBOC has made the necessary policy adjustments in response to the notable depreciation of the renminbi since August 15. When the renminbi exchange rate exceeded 6.94 on September 5, the PBOC reduced the foreign reserve requirement ratio from 8% to 6%. percent, beginning September 15.

The currency risk reserve ratio is a policy tool to prepare for risks that may arise in the future. The foreign currency reserve requirement ratio sets the bar on the amount of banks’ foreign currency deposits that must be kept with the PBOC. A lower forex RRR would mean that banks will have more currencies at their disposal.

A stronger U.S. dollar amid the U.S. Federal Reserve’s continued monetary policy tightening to curb runaway inflation is the main cause of the renminbi’s latest fluctuation, said Wen Bin, chief economist of China Minsheng Bank.

Since mid-August, the Chinese currency has depreciated by 5.7% against the greenback. But the pound hit its lowest level in 37 years on Friday and the euro remained at par with the greenback for more than two months. The renminbi’s exchange rate remained largely stable against the two major currencies, Wen said.

Chang Ran, senior researcher at the Zhixin Investment Research Institute, said Chinese regulators have a rich store of management tools to keep the renminbi’s exchange rate stable. These include offshore ratings and prudential adjustment parameters for cross-border corporate finance.

Shenwan Hongyuan Securities analysts write to clients that USD/CNY will return to 6.7-6.8 range by the end of this year amid resilient exports and economic recovery more dynamic.

But PBOC Deputy Governor Liu Guoqiang suggested at an earlier press conference that investors should maintain a rational attitude to the ups and downs of the renminbi exchange rate at a time of heightened market volatility. world and refrain from betting on “one-sided” trends in the currency market.

Sallie R. Loera