SHANGHAI: China’s yuan has weakened and looking set for the biggest one-day drop against the dollar in six months, after the central bank said it would raise the amount of foreign currency that financial institutions must set aside as reserves.
In a statement yesterday, the People’s Bank of China (PBoC) said it would raise the foreign exchange (FX) reserve requirement ratio or RRR by two percentage points to 6% from 4%, effective Nov 15.
The move would effectively tighten dollar liquidity and slow the pace of yuan gains, traders and analysts said.
“The PBoC sent a clear message to the market that they are concerned about the fast appreciation of yuan in October,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“China’s economy heavily depends on exports. A moderate appreciation may be tolerated, but the speed in October likely raised concerns in the policy circle.”
The yuan gained 0.74% against the US dollar in October, bringing the year-to-date rise to about 5%, underpinned by robust exports, trade surpluses and persistent corporate conversion into yuan.
The onshore yuan fell to a low of 6.6728 per US dollar after the announcement, the weakest level since Oct 23, before changing hands at 6.6702 per US dollar at 10.53am.
If the yuan retains all its losses by the late-night close, it would have lost 0.33% against the US dollar for the day, the worst daily percentage drop since May 15.
Its offshore counterpart followed the weakening trend and last fetched 6.6677 yuan per US dollar, down about 0.29% in Asian trading. The move also came ahead of a seasonal factor that was expected to lend the yuan more support.
Chinese exporters typically convert a larger share of their FX earnings into yuan toward year-end and ahead of the Lunar New Year, driven by accounting and administrative requirements, and to fund bonus payments and holiday expenses.
Such an influx of FX conversions usually leads to a rise in the yuan in December and January.
Prior to market opening yesterday, the PBoC lowered its midpoint rate for a second day in a row to 6.7150 per US dollar, 661 pips weaker than a Reuters estimate – its largest weak-side deviation since Sept 10. — Reuters
