China ‘hits back at the yuan bears’, but forex market intervention signals disquiet
- The People’s Bank of China (PBOC) announced it would raise the risk reserve requirement ratio for forward-exchange sales to 20 per cent
- Analysts say it indicates greater determination to defend the yuan and prevent negative sentiment spreading across forex, stock and bond markets
China’s swift action to stabilise the yuan on Monday may signal deeper worries about the impact of a surging US dollar and desire to maintain positive market sentiment ahead of the highly anticipated 20th party congress.
The People’s Bank of China (PBOC) announced it would raise the risk reserve requirement ratio for financial institutions when purchasing foreign exchange through currency forwards to 20 per cent from zero, starting on Wednesday.
The policy tool, which was last employed during foreign exchange market turbulence in 2015, will increase purchasing costs and, it is hoped, dampen speculative demand, thus helping stabilise expectations in the foreign exchange market amid aggressive rate hikes by the US Federal Reserve.
More interventions could be rolled out, with offshore market liquidity the next possible target
“This will hit back at the yuan bears,” said Serena Zhou, a senior China economist with Mizuho Securities.