BEIJING, Feb 27 - China's central bank announced on Friday that it will remove the foreign exchange risk reserve applied to some currency forward contracts, a change the bank said will lower the cost of buying U.S. dollars through those instruments.
Policy change and timing
The People’s Bank of China (PBOC) said it will cut the foreign exchange risk reserve rate for financial institutions when they purchase foreign exchange through currency forwards to zero from the previous 20% level. The revision is scheduled to take effect on March 2.
Return to pre-2022 stance
The step reverses the PBOC’s September 2022 action to raise risk reserve requirements, a measure then intended to stem rapid losses in the yuan and counter capital outflows. By restoring the reserve to zero, the central bank is effectively rolling back that particular tightening instrument for forwards.
Context on the yuan
The yuan posted its largest annual gain against the U.S. dollar since 2020 during the previous year, at one point strengthening past the psychologically important 7-per-dollar level. According to the central bank's announcement, that upward trend in the currency has extended into the new year.
What the announcement says
- The PBOC will lower the foreign exchange risk reserves on currency forwards from 20% to 0%.
- The change applies to financial institutions purchasing foreign exchange through forwards.
- The policy takes effect on March 2.
Immediate implication noted by the central bank
The PBOC characterized the move as a way to reduce the cost of dollar buying via forwards. The statement framed the action as a reversal of the reserve-rate increase implemented in September 2022, which had been intended to address rapid yuan depreciation and capital outflows at that time.
Reporting on the announcement is limited to the details provided by the PBOC about the reserve-rate change, the effective date, and the bank's description of prior policy intent. Additional consequences or market reactions were not detailed in the announcement.