China Raises Forex Deposit Reserve Ratio to 6% From 4%

The People's Bank of China will raise the foreign exchange deposit reserve ratio for local institutions to 6% from 4%, starting November 15. The central bank announced the move on Tuesday and said it is aimed at strengthening foreign exchange liquidity management by local institutions.

What the ratio does

The FX deposit reserve ratio determines the amount of dollar reserves local financial institutions are mandated to keep with the PBOC. An increase in the ratio is expected to lower dollar supplies and increase yuan liquidity. That combination is negative for the Chinese currency.

Beijing's discomfort with a strong yuan

The hike indicates some discomfort in Beijing over recent strength in the yuan, which surged to an over four-year high in October. A stronger yuan stands to pressure Chinese exports, which are the country's main economic engine. The yuan rose sharply this year following a string of stronger midpoint fixes from the PBOC.

Timing and signal

The new ratio takes effect on November 15. The PBOC said the change is meant to strengthen foreign exchange liquidity management by local institutions. For now, the central bank is using a reserve tool rather than a direct rate move to slow the yuan's rise.