Rising Too Fast, Time for a Pause! China’s Central Bank Raises FX Reserve Requirement Ratio to 6%, Putting the Brakes on the Yuan’s Rapid Appreciation

On the morning of November 3, the People’s Bank of China (PBOC) announced that, to strengthen foreign exchange liquidity management at financial institutions, it would raise their foreign exchange deposit reserve requirement ratio by 2 percentage points, from the current 4% to 6%, effective November 15, 2026. Following the announcement, USD/CNH jumped around 200 pips to a high of 6.6664, representing a decline of approximately 0.3% in the offshore yuan—its first drop in nearly three weeks. The onshore yuan also weakened past both the 6.65 and 6.66 levels against the dollar in succession after opening.

The offshore yuan had just experienced a sustained period of appreciation. On November 2, it strengthened past 6.65 to an intraday high of 6.6425 against the dollar, while the spot exchange rate closed the daytime session at 6.6458. Since the start of the year, the yuan’s spot exchange rate against the dollar had appreciated by approximately 4.91%, while the offshore yuan had gained more than 4.5%. The yuan had strengthened for four consecutive months, reaching its highest level since June 2022. The central bank’s decision to use the foreign exchange deposit reserve requirement ratio at this point is intended to moderate the pace of appreciation, rather than reverse its direction.

What Is the Foreign Exchange Deposit Reserve Requirement Ratio?

The foreign exchange deposit reserve requirement ratio determines the proportion of foreign currency deposits accepted by financial institutions that must be placed with the central bank. The vast majority of these deposits are denominated in US dollars.

The mechanism is straightforward. When the reserve requirement ratio rises, banks must place more dollars with the central bank, leaving fewer dollars available for lending, investment or sale in the domestic market. A tighter domestic dollar supply raises the dollar’s price relative to the yuan, marginally easing pressure on the yuan to appreciate.

To put the scale into perspective, outstanding foreign currency deposits totalled approximately $1.2 trillion at the end of September 2026. Raising the reserve requirement ratio from 4% to 6% means financial institutions will need to place approximately $24 billion in additional reserves with the central bank from November 15. This is relatively modest compared with China’s average daily foreign exchange trading volume of more than $800 billion and the $294.2 billion in foreign exchange settlements handled by banks in September alone.

This also defines the nature of the move: it is intended to slow the pace of yuan appreciation by tightening domestic dollar liquidity, rather than reverse the currency’s upward direction. The adjustment is “relatively moderate.” What deserves closer attention is the policy signal behind it, rather than the actual change in funds available.

Why Is the Central Bank Starting to Adjust the Pace?

Since October, the central bank has repeatedly signalled its position on the exchange rate. On October 8, it published “The People’s Bank of China’s Policy Position on the RMB Exchange Rate” on its official website. On October 19, Governor Pan Gongsheng outlined the exchange rate policy framework at the Annual Conference of Financial Street Forum, stressing 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.” The increase in the foreign exchange deposit reserve requirement ratio falls within this policy framework. It is the use of a macroprudential management tool, rather than “direct intervention.”

Another detail worth noting is the daily central parity rate. On Monday, November 2, the central bank set the USD/CNY midpoint at around 6.71, implying a substantially weaker yuan than the approximately 6.66 projected by a Reuters model-based survey. This means the central bank’s midpoint favoured the dollar relative to the yuan, already signalling that it did not want the yuan to become excessively strong. Raising the foreign exchange deposit reserve requirement ratio extends that signal through a quantitative policy tool.

Historically, this tool has always served a “two-way adjustment” function. During the yuan’s sustained appreciation in 2021, the central bank raised the foreign exchange deposit reserve requirement ratio twice, bringing it to 9%. When the yuan weakened in 2022 and 2023, it cut the ratio by a cumulative 5 percentage points to 4%, easing dollar shortages and stabilising the exchange rate. The tool is designed to smooth procyclical fluctuations, rather than establish a particular exchange rate level.

Some analysts believe this round of yuan appreciation has been driven by market forces rather than policy intervention. Analysis across multiple datasets suggests that the appreciation has little correlation with the narrative of “foreign investors increasing their holdings of Chinese assets.” Instead, persistent surpluses in banks’ spot and forward foreign exchange settlements and sales since March 2025 have been a more direct driver.

If the main force behind the appreciation is market supply and demand rather than policy guidance, then using a quantitative tool to lock up $24 billion can influence the pace, rather than the direction. By acting at this point, the central bank is conveying that appreciation can continue, but should not continue at its current speed. For foreign exchange traders, the practical signal is that Beijing prefers the yuan to appreciate in a “slower, steadier” manner, rather than maintain its rapid strengthening.

After four consecutive months of gains and a move past 6.65 against the dollar, policymakers’ tolerance for the pace of appreciation is narrowing. Locking up $24 billion is insufficient to reverse an appreciation trend driven by foreign exchange settlement and sales surpluses. However, it changes one thing: the market now knows that the area around 6.65 is a level attracting policymakers’ attention. The direction of appreciation has not been rejected, but from today onward, its pace will no longer be determined by the market alone.