Shanghai — China is tightening its foreign-exchange reserve policy as authorities seek to manage the yuan’s continued appreciation against the US dollar.
The People’s Bank of China announced on Tuesday that financial institutions will be required to hold a larger share of their foreign-currency deposits as reserves.
Under the adjustment, the foreign-exchange reserve requirement ratio will rise by 2 percentage points, increasing from 4% to 6% effective November 15.
A Reuters calculation using official foreign-exchange deposit figures estimated that the change would remove an additional $24 billion from the financial system.
The central bank said the adjustment was designed to improve the management of foreign-exchange liquidity among financial institutions.
The announcement quickly affected currency markets.
The onshore yuan fell by as much as 0.37% against the US dollar to 6.6728 per dollar, marking its weakest level since October 23. The decline also put the currency on track for its biggest single-day loss since May 15.
The offshore yuan also weakened following the announcement.
The policy change comes after months of gains for China’s currency. The yuan has appreciated more than 5% against the dollar so far this year, reaching its strongest level since 2022 and ranking among Asia’s best-performing currencies.
Its strength has been supported by solid exports, sizeable trade surpluses and businesses exchanging their foreign-currency holdings for yuan.
Marco Sun, chief financial market analyst at MUFG China, said the central bank was responding to the market-driven rise in the currency.
He explained that absorbing some of the available US dollar liquidity from the banking system could ease the momentum behind the yuan’s appreciation and discourage excessive expectations of further gains.
Nevertheless, analysts remain uncertain that the latest adjustment will fundamentally change the yuan’s broader trajectory.
Zhaopeng Xing, senior China strategist at ANZ, said the measure could have more symbolic importance than a lasting effect on the currency’s overall direction.
He noted that increased corporate foreign-exchange settlements into yuan had created an imbalance, with supply exceeding demand. The reserve requirement adjustment, he added, would not be enough to eliminate the resulting oversupply.
The latest policy also reverses an earlier move in September 2023, when the People’s Bank of China reduced the foreign-exchange reserve requirement to counter yuan depreciation and capital outflows.
Meanwhile, the central bank has continued making adjustments to its daily exchange-rate guidance.
On Tuesday, it set the yuan’s midpoint at 6.7150 per dollar, which was 661 pips weaker than a Reuters estimate. It marked the largest weaker-than-expected deviation since September 10.
PBOC Deputy Governor Zou Lan reiterated that China follows an exchange-rate policy in which market forces have a decisive role in determining currency values.
The latest adjustment highlights the central bank’s efforts to moderate the yuan’s appreciation while maintaining oversight of foreign-exchange liquidity within the financial system.
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