China's central bank moved on Tuesday, November 3, to slow the pace of the yuan's recent gains, announcing that banks will have to hold more of their foreign-currency deposits in reserve — a step that makes US dollars scarcer inside China's financial system.
The People's Bank of China (PBOC) said in an online statement that it will raise the foreign exchange reserve requirement ratio by 2 percentage points, to 6% from 4%, effective November 15, according to Reuters. The central bank said the decision was "aimed at strengthening the management of foreign exchange liquidity in financial institutions."
Source: Reuters
The adjustment would result in an extra $24 billion being withdrawn from the financial system, according to a Reuters calculation based on official foreign-exchange deposit data — yaani about 2,400 crore dollars parked with the central bank instead of circulating in the market.
Why Beijing is acting now
The yuan has been climbing. The onshore yuan strengthened to 6.64 against the US dollar on Monday, and on the same day the PBOC set its daily USD/CNY reference rate at around 6.71 — notably weaker for the yuan than the roughly 6.66 that a Reuters estimate had pointed to, in what traders read as another signal that the central bank is leaning against the currency's strength.
"The PBOC has sent a clear message to the market that it is concerned about the fast appreciation of the yuan," Zhiwei Zhang, chief economist at Pinpoint Asset Management, said, in comments reported by Dow Jones Newswires. Analysts say a too-fast rise hurts exporters by making Chinese goods dearer abroad, even as a stronger yuan makes imports cheaper.
Source: Dow Jones via TradingView
A policy tool used in both directions
The move reverses the PBOC's September 2023 decision to lower the same ratio, which was taken to stem the yuan's rapid losses and capital outflows at that time. The central bank raised the ratio twice in 2021, when the yuan was climbing strongly, and cut it in 2022 and again in 2023 as the currency weakened — the ratio has stood at 4% since that last cut, making this its first increase in several years.
The new 6% ratio takes effect on November 15. Currency traders will watch the PBOC's daily yuan fixing and Asian currencies, including the rupee, for signs of whether the signal alone slows the yuan — or whether Beijing follows it with further steps.
For markets across Asia, the signal matters beyond China: the yuan's direction influences regional currencies and trade pricing, and a central bank publicly pushing back against its own currency's strength is a reminder that Beijing wants stability, not a one-way climb, as global currency markets stay unsettled.