The PBOC will reduce the FX reserve requirement ratio from 9% to 8%. The decision is expected to enter into force on May 15. On April 15, the People’s Bank of China cut the required reserve ratios of banks by 25 basis points. The rate for FX required reserves, which was 5% as of 2007, was increased to 7% in May 2021, and to 9% in December 2021. With the decision taken, the foreign exchange RR rate was again reduced to 8%.
The ratio defined by the central bank of China for each category of eligible balance sheet items on a reserve basis. The ratio is used to calculate reserve requirements. Source: Bloomberg
The trend due to the weakness of the Chinese economy causes the weakening of the yuan to come to the fore while continuing to keep the Central Bank in its loosening monetary policy practices. The excessive devaluation of the yuan is now more a reflection of the risks in the economy and the associated loose monetary policy, rather than from the export perspective in trade. Volatility and imbalance increase in an environment where the Fed’s 75 bps rate hike is discussed. The PBOC fixing rate did not have a sufficient effect on stabilizing the yuan. While the theoretical interest rates strategy still prioritizes the growth perspective, maintaining the stabilization of the yuan is important for a healthier implementation of this policy. Because neither an overvalued yuan nor an overvalued yuan is currently ideal. The PBOC imposed harsh capital controls, tightened interest rates and incinerated approximately US$320 billion in foreign exchange reserves, following the shock decision on August 11, 2015 that the yuan depreciated by nearly 3% in two days against the US dollar.
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