China acts to curb yuan's gain by telling banks to lift reserves

[BEIJING] China forced banks to hold more foreign currencies in reserve for the second time this year, its most substantial move yet to rein in the surging yuan which this week strengthened to the highest in 3 years.

Financial institutions will need to hold 9 per cent of their foreign exchange in reserve from Dec 15, the central bank said in a statement on Thursday (Dec 9) evening Beijing time, a 2 percentage point increase.

Earlier in the day, the People's Bank of China (PBOC) had signalled a limit to its tolerance for the recent advances by setting its reference rate at a weaker-than-expected level. The gap between Thursday daily fixing set by the PBOC and the forecast in a Bloomberg survey of analysts and traders was the largest since mid-October. That was when yuan gains accelerated on strong trade data and hopes of easing tensions between China and the US.

The move, which the PBOC said will help liquidity management, effectively reduces the supply of US dollars and other currencies onshore - putting pressure on the yuan to weaken. The increase is the second rise this year, after the central bank hiked the ratio by 2 percentage points in June, the first increase since 2007.

BLOOMBERG