The People's Bank of China moves to restrain currency gains follow a 0.74% rise in October, driven by heavy corporate conversions and strong trade surpluses. In addition to raising foreign exchange reserve requirements, the central bank signaled its stance by setting the daily reference midpoint at 6.7150 per dollar, which came in 661 pips weaker than market expectations. Analysts anticipate the policy changes will effectively tighten onshore dollar liquidity and slow further advances against the greenback.
Key points
The policy intervention aims to rein in rapid currency gains that jeopardize Chinese expo…: The policy intervention aims to rein in rapid currency gains that jeopardize Chinese export competitiveness after a year-to-date climb of roughly 5%.
Raising the reserve ratio by two percentage points will effectively restrict domestic dol…: Raising the reserve ratio by two percentage points will effectively restrict domestic dollar liquidity across financial institutions.
Both onshore and offshore markets weakened rapidly, putting the currency on track for its…: Both onshore and offshore markets weakened rapidly, putting the currency on track for its steepest single-day drop since mid-May.
Sources checked by our analysis pipeline: 1
People's Bank of China (PBOC) said on Tuesday it would raise the foreign exchange reserve requirement ratio (RRR) for financial institutions by 2 percentage points to 6% from 4%, effective November 15.
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Traders and analysts told Reuters the move is expected to tighten dollar liquidity in the domestic market and moderate the pace of yuan appreciation.
The Chinese currency gained 0.74% against the dollar in October, taking its year-to-date appreciation to around 5%, supported by robust exports, trade surpluses and persistent corporate demand for yuan conversion.
The rapid strengthening of the currency has raised concerns among policymakers about its potential impact on China's export competitiveness.
Following the announcement, the onshore yuan weakened to 6.6728 per dollar, its lowest level since October 23. It was last trading at 6.6702 per dollar at 0253 GMT.
Reuters reported that if the yuan holds on to its losses until the end of Tuesday's trading session, it would mark a decline of 0.33% against the dollar, its steepest single-day fall since May…
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