As the yuan sizzles, China’s central bank deploys double-barrelled policy tweak
Regulators refine cross-border rules and cut the foreign exchange risk reserve ratio for forward forex sales to zero, aiming to provide stable offshore liquidity and help firms manage risks
With China’s currency having steadily strengthened in recent months, the central bank has rolled out a pair of measures to lower foreign exchange hedging costs and support cross-border yuan financing.
In a notice on Thursday, the People’s Bank of China refined the framework for domestic banks to conduct cross-border yuan interbank financing, explicitly endorsing their role in providing stable yuan liquidity to offshore markets through regulated channels.
The move comes as Beijing has been seeking to enhance China’s offshore yuan market and further internationalise the currency.
According to the PBOC, the changes tie the upper limit on net outbound yuan lending to banks’ capital strength and set adjustable parameters for countercyclical adjustments. These reforms, the bank said, “markedly enhance the rule-based nature and transparency” of the management of such businesses.
The adjustments will also help “ensure a smoother and more stable liquidity supply in the offshore yuan market”, the PBOC added.
Separately, the central bank announced on Friday that it would cut the foreign exchange risk reserve ratio for forward forex sales from 20 per cent to zero, effective on Monday. The goal, it said, is to “promote the development of the foreign exchange market and better support enterprises in managing exchange rate risks”.
The move means lower costs for banks to provide forward US dollar sales, making it cheaper for enterprises to hedge. This, in turn, could ease immediate demand for yuan and potentially lead to a weakening of the currency.
Moving forward, the central bank “will continue to guide financial institutions to improve their foreign exchange hedging services for enterprises and keep the yuan exchange rate basically stable at a reasonable and balanced level”, it said in a statement on its official website.
The recent surge in yuan strength has been supported by easing US-China trade tensions, exporters’ massive trade surplus-driven demand for yuan settlement, and a weaker US dollar.
On Thursday, the offshore yuan strengthened to 6.8267 against the US dollar – the strongest level since March 2023. A lower yuan exchange rate figure means it takes fewer yuan to purchase one dollar, indicating a stronger Chinese currency.
Following the PBOC’s announcement, the yuan quickly weakened on Friday morning, with the offshore rate briefly slipping past 6.86 to the US dollar. It later recouped some losses, trading at 6.856 per dollar by late afternoon.
A research note from Goldman Sachs on Friday said the move “likely signals the PBOC’s growing concern over the excessive speed of [yuan] appreciation”.
It added that the recent pace of strengthening “appears too rapid relative to history”, noting that the PBOC had signalled its discomfort with the rapid pace of appreciation through weaker daily fixings compared with market levels.
Also on Friday, the PBOC set the yuan’s fixing rate at 6.9228 to the US dollar, unchanged from the prior day’s level, which was already the strongest fixing rate since May 2023, but still well below the offshore level.
The central bank has long maintained its stance of keeping the yuan’s exchange rate “basically stable at a reasonable and balanced level”, preventing excessive fluctuations while also upholding the market’s decisive role in exchange rate formation and preserving the flexibility of the currency’s exchange rate.