On Friday, the People's Bank of China announced that, starting from September 15, the reserve requirement ratio (RRR) for financial institutions' foreign exchange deposits will be reduced from 6% to 4%. This marks the first reduction of the foreign exchange deposit reserve requirement ratio by China's central bank this year and the third time in history.
Following the announcement, the onshore yuan exchange rate against the US dollar soared to 7.2360, reaching its highest level since August 11. The offshore yuan to US dollar exchange rate climbed to 7.2387, marking the highest level since August 14.
The People's Bank of China stated that the move is aimed at enhancing financial institutions' ability to use foreign exchange funds. Institutions anticipate that the 200 basis points reduction in the reserve requirement ratio will effectively release about 16.4 billion US dollars of foreign exchange.
Traders and analysts note that while the reduction in the foreign exchange deposit reserve requirement ratio may alleviate the depreciation pressure on the yuan, it is unlikely to reverse the yuan's mid- to long-term depreciation trend. This action by the central bank is more about sending a signal to the financial markets that China is willing to take measures to prevent the depreciation of the yuan if necessary.
The yuan is one of the worst-performing currencies in Asia this year, with the yuan to US dollar exchange rate dropping by about 5% amidst China's significant economic slowdown and the widening interest rate differential between China and the US. Ken Cheung, Chief Asian Foreign Exchange Strategist at Mizuho Bank, stated that reducing the foreign exchange deposit reserve requirement ratio amid China's central bank's implementation of a new round of monetary easing policies will help alleviate the depreciation pressure on the yuan.
As authorities become increasingly concerned about the trend of yuan depreciation, the Chinese government has intensified its support for the yuan exchange rate. Measures include setting a stronger-than-expected midpoint exchange rate, requiring domestic banks to reduce overseas investment, and adjusting macro-prudential regulation parameters for cross-border financing.
