China battles yuan losses by unleashing foreign-exchange onshore

CHINA slashed the amount of foreign-exchange deposits banks need to set aside as reserves for the second time this year to boost the yuan after the currency hit a fresh 2-year low.

Financial institutions will need to hold 6 per cent of their foreign-currency deposits in reserves starting from Sep 15, the People’s Bank of China (PBOC) said in a statement on Monday (Sep 5) - lower than the current level of 8 per cent.

The move is expected to increase the supply of foreign currencies, thereby making it more appealing for traders to buy the yuan. The change will improve financial institutions’ ability to use foreign exchange funds, the PBOC said.

The yuan slid as concerns over monetary-policy tightening in the US and a deepening energy crisis in Europe bolstered the US dollar. And while the string of stronger-than-expected PBOC fixings have slowed the yuan’s slide, banks including Goldman Sachs Group still expect it to fall to 7 per US dollar as concerns over a Covid lockdowns in major Chinese cities and a sluggish property sector weigh on the economy.

The PBOC last cut the reserve ratio for foreign exchange deposits in April when the yuan fell more than 4 per cent in reaction to a city-wide lockdown in Shanghai.

The onshore yuan fell 2.2 per cent last month and is on track for its seventh straight month of losses.

China’s financial institutions held US$953.6 billion of foreign-currency deposits as of July, down from a record US$1.1 trillion in February.

The stockpile has served as a buffer for the yuan amid headwinds. The Chinese currency is still around levels seen in December in trade-weighted terms, according to the CFETS RMB Index. BLOOMBERG