China encourages dollar buying to slow yuan ascent
PBOC takes steps to slow the yuan's rapid rise by removing foreign exchange risk reserves for certain forward contracts, encouraging dollar buying to maintain a stable exchange rate
BEIJING, Feb 27 (Reuters) - China's central bank moved on Friday to slow the pace of rapid yuan appreciation, saying it will scrap the foreign exchange risk reserves for some forward contracts in a move that would encourage dollar buying.
The decision came after yuan firmed to a near three-year high against the U.S. dollar on Thursday in onshore trading, extending a rally driven by exporters rushing to sell dollars following last year's record trade surplus.
China's offshore yuan weakened roughly 0.2% on the news.
"It's quite unexpected to me," said Yuan Tao, an analyst at Orient Futures. "It means the PBOC is intervening as the yuan's appreciation is too fast."
The People's Bank of China (PBOC) said it would lower the foreign exchange risk reserves for financial institutions when purchasing foreign exchange through currency forwards to zero from 20%, starting March 2.
The move reverses the PBOC's September 2022 decision to raise the risk reserve requirements to stem the yuan's rapid losses and capital outflows.
The central bank said the move was to "support enterprises in managing exchange rate risks," and that the PBOC would continue to maintain the basic stability of the renminbi exchange rate at a "reasonable and balanced level."
Liu Yang, general manager of the financial market business department at Zheshang Development Group, said in the near term, the move will release some pent-up demand for buying dollars through forwards, helping to balance market supply and demand.
"Conversely, it also suggests the PBOC sees little risk of further yuan depreciation and still believes there is significant room for the currency to appreciate."
The yuan notched its biggest annual gain against the dollar since 2020 last year, strengthening past the psychologically important 7-per-dollar level, and the upward momentum has continued into the new year.
Xu Tianchen, a senior economist at the Economist Intelligence Unit, said "the renminbi has been strong even as the dollar is largely stable, suggesting strong market conviction that it's undervalued."
"PBOC's adjustment is a common move to curb volatility - it did similar things several times in the past when the renminbi was under extreme appreciatory or depreciatory pressures."
