The People’s Bank of China announced on Friday its decision to lower the foreign exchange reserve requirement for banks as part of efforts to counter further depreciation of the yuan and bolster a slowing economic rebound.
In a statement posted on the central bank’s website, the PBOC revealed that it would cut the foreign exchange reserve requirement ratio (RRR) by 200 basis points, reducing it from 6% to 4%, effective from September 15.
This move is set to release a substantial amount of foreign exchange reserves, particularly in dollars, which is expected to provide much-needed support for the yuan. Following the announcement, the Chinese currency briefly surged by 0.5% before stabilizing to trade flat.
The decision is anticipated to make it more cost-effective for Chinese banks to hold dollars and will also grant the PBOC greater flexibility to lower interest rates, thereby stimulating economic growth.
Despite the short-term boost expected from the RRR cut, the yuan continues to confront persistent challenges, including deteriorating sentiment toward the Asian economy and a growing gap between domestic and U.S. interest rates.
The yuan ranks among the weakest-performing Asian currencies this year, depreciating by approximately 5% due to a series of lackluster economic indicators from China.
While the PBOC has endeavored to curb further declines in the yuan through daily midpoint adjustments and currency market interventions, the currency’s outlook remains skewed to the downside, particularly if local monetary policy becomes more accommodative to support economic expansion.
Under guidance from the PBOC, Chinese banks have already begun reducing their yuan deposit rates, a move that is expected to increase domestic liquidity and result in a weaker yuan in the months ahead.
Traders have generally turned bearish on the yuan due to uncertainties surrounding the Chinese economy and a pessimistic outlook for local interest rates.
