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China’s central bank has said it will cut the amount of foreign exchange reserves held by financial institutions, signaling its determination to support a weaker yuan.
The yuan has fallen more than 5 percent against the dollar this year amid concerns about the world’s second-largest economy. The economy’s recovery has been slow since Beijing abandoned coronavirus restrictions in early 2023.
Policymakers have stepped up new measures to support China’s currency and economy, especially in the real estate sector. Guangzhou and Shenzhen this week eased mortgage conditions for first-time buyers.
But doubts about the prospects of cash-strapped developers such as Evergrande and Country Garden have dampened demand for Chinese securities and prompted investment banks to cut their forecasts for the yuan’s dollar exchange rate.
The People’s Bank of China said on Friday it would cut banks’ foreign exchange reserve requirement from 6% to 4% from Sept. 15 “to improve financial institutions’ ability to use foreign exchange funds”. The yuan has since gained 0.2 percent to 7.2431 per dollar.
The RRR cut increases the amount of dollars available in the local market, meaning commercial banks have the ability to lower interest rates on dollar deposits. The move is aimed at making the yuan less attractive against the dollar, which has been weighing on the yuan.
Liu Beiji, head of China macro strategy at Standard Chartered Bank, estimates that the rate cut will only release about US$16 billion in US dollar liquidity. She said the impact of the move was mainly to show the central bank’s determination to support the yuan, because “the amount itself is insignificant from the perspective of liquidity and the dollar exchange rate”.
The rate cut and other recent appreciation measures “are only aimed at stabilizing the renminbi exchange rate and reducing excessive speculative positions, rather than changing the trend of renminbi depreciation against the dollar,” Liu added.
Foreign investors sold a net 148 billion yuan ($20 billion) of Chinese government bonds in the first seven months of the year, data from Hong Kong’s Bond Connect investment program showed, as China’s monetary easing measures and Fed rate hikes widened interest . The interest rate differential between RMB debt and USD debt.
Foreign investors also dumped a record $12 billion worth of Chinese stocks in August, and U.S. Commerce Secretary Gina Raimondo warned during a visit to Beijing this week that U.S. companies were beginning to see China as “unable to invest”.
“It will be a very uphill battle for the Chinese authorities to restore confidence in the renminbi given the strong dollar and weak domestic property sector data,” said Sean Callow, senior currency strategist at Westpac. The move is not going to change the rules of the game.”