China Unexpectedly Cuts FX Reserve Ratio To Support Plunging Yuan
Just minutes after the offshore yuan’s extended slide dragged it below the key psychological level of 6.60, a level not breached since Nov 2020, China signaled that while it is now ok with a sliding yuan, there is a limit how much devaluation it will take, and shortly after 7am EDT the PBOC moved to limit the drop in the yuan by cutting the reserve requirement, or how much money banks need to have in reserve for their foreign currency holdings.
The move, which is the opposite of a RRR hike unveiled by the PBOC back in December and which was meant to prevent the yuan from rising too far, came after the yuan plunged in reaction to a growing Covid-19 outbreak in Shanghai and as of this weekend, Beijing too. Financial institutions will need to hold 8% of their foreign exchange in reserve starting May 15, the central bank said in a statement Monday, down from than the current level of 9%.
In a statement, the PBOC said that the cut is aimed at “increasing banks’ capabilities of forex fund use” and will help liquidity management. The change would increase the supply of dollars and other currencies onshore and relieve the yuan’s weakness.
Today’ cut follows two hikes last year when the central bank was trying to limit a strong currency, the opposite of the situation now.
While the news did manage to prop up the yuan modestly, with the offshore yuan narrowing arrowed its loss to 0.7% from 1.3% earlier in the day and trading at 6.5711 to the dollar after the announcement, it is still down on the day, and we don’ anticipate any material reversal in the recent downtrend in the yuan since China’ economy is desperately in need of more stimulus or faces a major hit to growth, both of which hint at far more weakness in the yuan.
Tyler Durden Mon, 04/25/2022 – 08:23