Search ForexCrunch

Economist at UOB Group Ho Woei Chen, CFA, and Senior FX Strategist Peter Chia, assess the latest announcement from the PBoC.

Key Quotes

“The People’s Bank of China (PBOC) announced a 200 bps hike to the reserve requirement ratio (RRR) for foreign currency deposits to 7% from current 5% with effect from 15 June. The foreign currency RRR had been steady since the increase from 3% to 5% between September 2006 and May 2007.”

“As with the previous hikes following the CNY de-peg in July 2005, the move is also likely targeted at tempering the CNY appreciation pressure. This works by reducing onshore foreign currency liquidity and thus making them more expensive relative to the CNY.”

“This hike in foreign currency RRR is a “symbolic” move, against the background of recent comments by various officials/former officials about the pace of CNY appreciation. It is thus clear from the PBOC that further gains in the CNY, especially those fueled by one-sided speculation will not run unchecked.”

“The foreign currency RRR is rarely used as a policy tool to curb CNY strength as the PBOC usually signals its posturing through the daily USD/CNY fixing as well as official statements and comments which are closely monitored by markets. While there are risks of further steps that the PBOC could take if the USD/CNY continues to fall at a sharper-than-expected pace, the central bank would be mindful that a heavy handed approach could hurt its CNY internationalization goal.”

“Overall, we reiterate our current set of USD/CNY forecasts, at 6.36 at 2Q21, 6.33 at 3Q21, 6.30 for both 4Q21 and 1Q22…”