China Economy

Leaked memo reveals China central bank’s dilemma in battle to keep yuan stable

A confidential letter from the central bank to commercial lenders reveals the struggle between conflicting goals of easing monetary goals and protecting the value of the yuan

PUBLISHED : Sunday, 24 January, 2016, 4:24am
UPDATED : Sunday, 24 January, 2016, 9:21am

The People’s Bank of China is reluctant to further reduce the required reserve ratio for fear of such a move resulting in the weakening of the yuan, according to a leaked document.

The information, reportedly leaked from minutes of Tuesday’s meeting between the central bank and commercial lenders, was shared widely after it was published on major mainland online portals including and

The required reserve ratio refers to the amount of deposits that commercial lenders are required to put with the central bank as reserves, rather than to lend out.

The PBOC’s news division did not respond to requests for confirmation of the leaked memo.

The memo sheds light on the challenge the PBOC faces in trying to achieve two conflicting goals. It has to ease monetary supply to raise liquidity to boost the ailing economy. But it also has to stop the yuan from weakening too much, which could happen in the case of increased liquidity.

“A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate...”

According to the memo, Zhang Xiaohui, an assistant central bank governor in charge of monetary policy, told commercial bankers that the PBOC had to be very careful in maintaining the renminbi’s exchange rate stability when managing liquidity.

A key lesson for the central bank was the aftermath of its move in late October to cut interest rates and the reserve ratio. The move greatly loosened liquidity conditions, and “increased yuan depreciation expectations and added pressure on the yuan to weaken”, Zhang said.

The PBOC had to balance ensuring sufficient liquidity in the banking system and managing the stability of the yuan exchange rate, the official said.

“A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate,” Zhang was quoted as saying. “A cut in the required reserve ratio would be too strong a signal [to send to the market], and we can use other tools to provide the market with liquidity.”

The central bank could therefore be expected to increase liquidity in the economy through open-market operations that were less drastic than cutting the reserve ratio, the memo said.

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The Lunar New Year period, which falls in early February this year, is when cash demand peaks. Based on historical data, the PBOC is likely to release an extra 1.6 trillion yuan (HK$1.9 trillion) into the banking system to help banks cope with the increased cash demand.

But Zhang also said banks had lent out money too rapidly in the first half of the month – over 1.7 trillion yuan – and that they had to slow down their lending process.

Yi Gang, a vice-governor of the PBOC, warned banks not to repeat their mistake in the 2009 lending spree, during which many loans turned bad when they could not be collected back, according to the memo.

The central bank was determined to keep the yuan stable, Yi said. “The personal annual quota of $50,000 has not changed. Some individual bank clients are sending messages to their clients, encouraging dollar buying ... If you spread false information to cause panic, relevant authorities will come after you,” he said.

Haitong Securities chief economist Li Xunlei wrote in a note that the leaked memo meant that the probability of a reserve ratio this year was small and that for an interest rate cut was “even smaller”. “It’s not a good time for China to conduct exchange rate reform and yuan internalisation,” he wrote.