yuan: China lowers banks’ FX reserve ratio to counter falling yuan

Beijing: China moved to limit the drop in the yuan by cutting the amount of money that banks need to have in reserve for their foreign currency holdings.

The move came after the yuan dropped to the lowest level against the dollar in 17 months in reaction to a small but growing Covid-19 outbreak in Beijing. Financial institutions will need to hold 8% of their foreign exchange in reserve starting May 15, the central bank said in a statement Monday, lower than the current level of 9%.

The cut is aimed at “increasing banks’ capabilities of forex fund use” and will help liquidity management, the People’s Bank of China said in the statement. The change would increase the supply of dollars and other currencies onshore and relieve the yuan’s weakness.

This follows two hikes last year when the central bank was trying to limit a strong currency, the opposite of the situation now.