The People’s Bank of China (PBoC) has removed the 20% reserve requirement for forward forex trading. This is similar to the policy action taken in September 2017 when the CNY was appreciating quickly. This policy change is unlikely to reverse the downward trend in USD/CNY, in the view of economists at HSBC.
“On 10 October, the PBoC announced that the foreign exchange (forex) risk reserve ratio for forward forex trading will be reduced from 20% to zero, effective 12 October. The central bank said on the same day that it will continue to maintain flexibility in the CNY exchange rate and stabilise market expectations.”
“We expect that a removal of the policy tool should not reverse the downtrend by USD/CNY. Indeed, the removal of the forex reserve requirement in September 2017 only caused a temporary upward squeeze by USD/CNY. But by December 2017, the yuan was strengthening again to reflect, among other things, China’s relative underlying economic strength (indicated by a widening interest rate differential between China and the US).”
“With the Federal Reserve expected to keep short-end US rates near zero for the next couple of years, the yield advantage of the CNY will likely remain. We also think China will continue to have a positive basic balance, given the larger current account surplus and foreign bond inflows. We believe the PBOC will continue with market-oriented FX reforms and accelerate CNY internationalisation in the coming years. All in all, we expect the CNY to remain resilient over the medium-term.”