Chinese Yuan: Appreciation curbed by PBoC – Commerzbank

An increase in the People’s Bank of China’s FX reserve requirement ratio is intended to temper rapid CNY appreciation following a 13-session winning streak, according to Commerzbank’s Charlie Lay and Dr. Henry Hao. Both USD/CNY and USD/CNH rebounded to 6.67 following the announcement. The analysts describe the measure as counter-cyclical, emphasising that it seeks to maintain two-way flexibility, not reverse the appreciation trend.

PBoC moves to curb the pace of CNY appreciation

"The People’s Bank of China (PBoC) moved to cool CNY appreciation yesterday, raising the foreign-currency reserve requirement ratio (FX RRR) by 2%-points to 6%, effective 15 November. The announcement prompted a reversal in CNY following 13 consecutive sessions of gains, the longest winning streak since 1996."

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"The move was unexpected, reinforcing the PBoC's resistance to rapid currency appreciation. The gap between the PBoC’s daily fixing at 6.7150 and our estimated fixing rate of 6.6516 widened to 634 pips, the largest divergence since 10 September."

"The mechanics of the hike work by forcing banks to lock up a larger share of FX deposits, draining dollar liquidity from the onshore system and easing upward pressure on CNY. The move mirrors a similar playbook deployed in 2021, when the PBoC raised the FX RRR twice to lean against yuan strength."

"However, the measure is likely to slow the pace of appreciation than reverse the underlying trend, which remains supported by the large trade surplus."

"The FX RRR hike is widely read as a counter-cyclical signal rather than a directional reversal. The PBoC appears intent on preserving two-way flexibility and preventing appreciation expectations from becoming self-reinforcing, particularly as global investors have begun joining domestic exporters on the yuan-buying side. Further PBoC action, such as lowering the macro-prudential adjustment parameters, cannot be ruled out if appreciation pressures resume."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)