China braces for cool yuan rally by increasing foreign exchange reserves
China’s central bank has increased the amount of foreign currency deposits that lenders must set aside as reserves, a move that could help stem the rally in the yuan by reducing the supply of other currencies in the country.
The People’s Bank of China increased the ratio by 2 percentage points to 7%, the first increase since 2007, which will help improve liquidity management, it mentionned in a statement Monday.
This move will effectively tighten the supply of foreign currencies in the Chinese onshore market, increasing borrowing costs. This is another step taken by policymakers last week to signal that the The yuan has rallied too much recently after breaking through multi-years high against its major peers.
“It’s more of a symbolic gesture, because no matter how the PBOC raises the cost of financing foreign currencies, the yuan rate will almost always be higher,” said Zhou Hao, economist at Commerzbank AG in Singapore. Still, “the PBOC wants to show the market – if the rally continues it has many measures to slow it down and the market will fail if it wants to make speculative bets.”
The Chinese yuan is heading for its best month since November, as the currency jumped 1.7% on the back of a weaker dollar and an influx of capital. Authorities have sought to limit its rapid rise by having state media flag up appreciation risks, while the PBOC has set a lower-than-expected fixing for two days.
The yuan erased a gain of up to 0.2% to trade little change at 6.3684 per dollar at 5:30 p.m. in Hong Kong, while the offshore rate swung to a loss of 0.1% against a gain of 0.1%.
– With the help of Tian Chen and Ran Li