China's central bank announced a policy change on Friday that eliminates a foreign exchange risk reserve requirement for certain currency forwards, a step that will lower the effective cost of buying U.S. dollars via those contracts. The People’s Bank of China said it will cut the foreign exchange risk reserves that financial institutions must hold when purchasing foreign exchange through forwards to zero from the prior 20%, with the change taking effect on March 2.
The measure applies specifically to financial institutions engaging in foreign exchange purchases through currency forwards. By removing the 20% reserve requirement, the central bank reduces a supplemental cost component that had been applied to such transactions, which market participants had treated as an additional buffer against FX exposure.
This decision reverses an action the central bank took in September 2022 when it raised the foreign exchange risk reserve ratio. That 2022 adjustment was implemented at the time to help stem rapid losses in the yuan and to address capital outflows that were occurring then. The recent announcement brings the reserve ratio back down to zero, effectively undoing that prior tightening.
The currency has since experienced notable strength. In 2025 the yuan recorded its largest annual gain against the U.S. dollar in five years, and it strengthened past the 7-per-dollar level. According to the central bank's statement, that momentum largely carried into the new year.
Taken together, the central bank's move lowers the direct reserve-based cost for banks and other financial institutions when they use forwards to buy dollars. The statement sets a clear effective date of March 2 for the change. Beyond the change in the reserve ratio and the reference to past actions in September 2022, the announcement does not provide additional operational details.
The immediate factual implications are straightforward: the reserve ratio on certain FX forwards will be zero instead of 20% from March 2, the policy reverses the 2022 increase that had been aimed at stemming yuan losses and capital outflows, and the yuan had posted its strongest annual gain against the dollar in five years in 2025 while moving past the 7-per-dollar level into the new year.