China to cut forex deposit reserve requirement in 'clear signal to stabilise yuan'
China will lower banks' foreign exchange deposit reserve requirement next month in an attempt to stem the rapid weakening of the yuan against the US dollar.
The People's Bank of China (PBOC) said on Monday that it will cut the amount of foreign exchange deposits banks have to set aside by 1 percentage point to 8 per cent from May 15.
The move is aimed at enhancing the capabilities of financial institutions in managing foreign exchange funds, the central bank said in a brief statement.
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The yuan weakened sharply against the US dollar by more than 1 per cent last week in the onshore market, hitting the lowest level since August 2011, amid increasing market concerns over capital outflow in the face of the planned US rate increases and the slowdown of China's economy.
The offshore rate broke 6.60 per US dollar in midday trading on Monday ahead of the PBOC move and quickly rebounded by 300 basis points soon after the announcement. The offshore rate last traded at 6.5512 per US dollar.
The onshore yuan closed at 6.5487 per US dollar on Monday, weaker than the previous close at 6.4875 on Friday.
The central bank raised the reserve ratio twice last year to stem the rapid strengthening of the currency.
"The move is likely to improve the domestic forex liquidity to facilitate the stable performance of the forex market, and is a clear signal to stabilise the yuan exchange rate," said Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange.
Wang Chunying, deputy head of China's foreign exchange regulator, said on Friday that a flexible yuan in recent years has effectively eased external pressure, and Wang called on companies to be more rational in foreign settlements to help stabilise the yuan.
China's gross domestic product rose by 4.8 per cent in the first quarter of the year, but analysts have warned that Beijing's strict coronavirus controls, Russia's invasion of Ukraine and the US Federal Reserve's rate increases will put downward pressure on the economy in the second quarter and challenge Beijing's target for an economic growth of "around 5.5 per cent" for the whole of 2022.
Former finance minister Zhu Guangyao said on Sunday that the US monetary policy shift was expected to come at an "unprecedented intensity and pace" which will be "the biggest pressure for us".
Wang also said on Friday that China's foreign exchange regulator would closely monitor the situation and guide orderly movement of cross-border capital to keep the yuan basically stable.
This article originally appeared on the South China Morning Post (SCMP).
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