Is the Yuan Rising Too Fast? China’s Central Bank Raises FX Reserve Requirement Ratio to 6% to Curb Rapid Appreciation

The offshore yuan recorded its first decline in nearly three weeks after the People’s Bank of China (PBOC) announced on the morning of 3 November that it would increase financial institutions’ foreign exchange deposit reserve requirement ratio. Intended to strengthen foreign exchange liquidity management at these institutions, the 2 percentage point increase will take the ratio from the current 4% to 6%, effective 15 November 2026. Following the announcement, USD/CNH surged around 200 pips to a high of 6.6664, equivalent to an approximately 0.3% fall in the offshore yuan. After opening, the onshore yuan also slipped through 6.65 and then 6.66 against the dollar.

The policy announcement followed a sustained rally in the offshore yuan. On 2 November, the currency moved beyond 6.65 to reach an intraday high of 6.6425 against the dollar, with the spot exchange rate ending the daytime session at 6.6458. From the start of the year, the yuan’s spot exchange rate against the dollar had risen by approximately 4.91%, while the offshore yuan had advanced more than 4.5%. Four consecutive months of appreciation had taken the yuan to its strongest level since June 2022. By adjusting the foreign exchange deposit reserve requirement ratio at this stage, the central bank aims to temper the speed of appreciation, not change its direction.

How Does the Foreign Exchange Deposit Reserve Requirement Ratio Work?

Financial institutions must deposit a specified share of the foreign currency deposits they accept with the central bank. That share is set by the foreign exchange deposit reserve requirement ratio. US dollars account for the vast majority of these deposits.

A higher reserve requirement obliges banks to hold more dollars with the central bank. As a result, fewer dollars remain available for domestic lending, investment or sale. This reduction in domestic dollar supply makes the dollar more expensive relative to the yuan, slightly relieving the pressure for yuan appreciation.

The scale of the adjustment becomes clearer when measured against the deposit base. At the end of September 2026, outstanding foreign currency deposits stood at approximately $1.2 trillion. An increase in the reserve requirement ratio from 4% to 6% therefore requires financial institutions to deposit approximately $24 billion in additional reserves with the central bank from 15 November. The amount is relatively small alongside China’s average daily foreign exchange trading volume of more than $800 billion, as well as the $294.2 billion of foreign exchange settlements processed by banks in September alone.

The purpose of the measure follows from this: reducing domestic dollar liquidity is meant to restrain the pace of yuan appreciation, not turn the currency downwards. The adjustment is “relatively moderate.” Its policy message warrants greater attention than the actual reduction in available funds.

Why Does the Central Bank Want to Moderate the Pace Now?

Repeated signals on exchange rate policy have come from the central bank since October. Its official website carried “The People’s Bank of China’s Policy Position on the RMB Exchange Rate” on 8 October. Later, at the Annual Conference of Financial Street Forum on 19 October, Governor Pan Gongsheng set out the exchange rate policy framework, emphasising that “under certain circumstances, the PBOC uses macroprudential management tools, and in extreme circumstances may even intervene directly in the foreign exchange market, to correct market ‘herding behaviour’ and the self-reinforcement of irrational expectations.” Raising the foreign exchange deposit reserve requirement ratio is consistent with that framework: it deploys a macroprudential management tool rather than constituting “direct intervention.”

The daily central parity rate offers another important indication. The central bank fixed the USD/CNY midpoint at around 6.71 on Monday, 2 November, substantially weaker for the yuan than the approximately 6.66 indicated by a Reuters model-based survey. By favouring the dollar over the yuan, the midpoint had already conveyed the central bank’s reluctance to see excessive yuan strength. The higher foreign exchange deposit reserve requirement ratio reinforces this message through a quantitative policy measure.

The record shows that the instrument has consistently provided “two-way adjustment”. As the yuan appreciated steadily in 2021, the central bank increased the foreign exchange deposit reserve requirement ratio twice, taking it to 9%. During the currency’s weakness in 2022 and 2023, the ratio was reduced by a cumulative 5 percentage points to 4%, alleviating dollar shortages and helping stabilise the exchange rate. Rather than target a specific exchange rate, the instrument is intended to moderate procyclical swings.

Market forces, rather than policy intervention, are behind the current phase of yuan appreciation, according to some analysts. An examination of multiple datasets suggests little connection between the currency’s gains and the narrative of “foreign investors increasing their holdings of Chinese assets.” A more direct source of support has instead been the persistent surpluses in banks’ spot and forward foreign exchange settlements and sales since March 2025.

Where market supply and demand, rather than policy guidance, are the primary drivers of appreciation, a quantitative measure that locks up $24 billion can alter the speed of the move rather than its direction. The timing of the central bank’s action signals that further appreciation is acceptable, but not at the prevailing pace. For foreign exchange traders, the practical message is that Beijing wants a “slower, steadier” rise in the yuan instead of continued rapid gains.

Policymakers are becoming less tolerant of the speed of appreciation after four consecutive months of gains and the yuan’s move beyond 6.65 against the dollar. With foreign exchange settlement and sales surpluses driving the trend, locking up $24 billion is not enough to reverse it. What has changed, however, is the market’s awareness that levels around 6.65 are drawing policymakers’ attention. Appreciation itself has not been ruled out, but from today onwards, the market will no longer have sole control over its pace.