The People's Bank of China, the country's central bank, is adjusting the foreign currency deposit reserve requirement for financial institutions in response to the strengthening of the yuan.
On November 3, the bank announced on its website that it will raise the foreign currency deposit reserve requirement from the current 4% to 6%, effective November 15. This marks the first adjustment in over three years.
With the increase in the reserve requirement, financial institutions will need to deposit a larger portion of the foreign currency deposits they receive from customers as reserves with the People's Bank. This will reduce the amount of foreign currency funds available for financial institutions to operate, thereby alleviating upward pressure on the yuan's value. According to Reuters, this measure is expected to absorb approximately $24 billion (about 32 trillion won) in foreign liquidity from the Chinese financial market.
In December 2021, China also raised the foreign currency deposit reserve requirement to mitigate the pressure on the yuan's strength. However, in September 2023, the reserve requirement was lowered from 6% to 4% in response to the yuan's depreciation.
This latest move comes as the yuan has been experiencing a sharp rise. Reuters reported that the yuan has appreciated over 5% against the dollar this year, marking one of the highest increases among major Asian currencies.
Following the announcement of the reserve requirement increase, the yuan's value fell. In the onshore foreign exchange market, the yuan briefly dropped 0.37% against the dollar, trading at 6.6728 yuan per dollar, indicating a 0.37% decline in its value against the dollar.
* This article has been translated by AI.
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