The Chinese yuan has been strengthening persistently recently, and on November 3, the People's Bank of China decisively acted by raising the foreign exchange deposit reserve requirement ratio for financial institutions to stabilize market expectations and maintain the smooth operation of the foreign exchange market.
On that day, the People's Bank of China announced that, in order to strengthen foreign exchange liquidity management at financial institutions, it decided to raise the foreign exchange deposit reserve requirement ratio for financial institutions by 2 percentage points starting from November 15, 2026, increasing it from the current 4% to 6%.
This is the first increase in the foreign exchange deposit reserve requirement ratio in nearly five years, reflecting the continued appreciation trend of the yuan against the US dollar. In the first nine months of this year, the yuan appreciated by a cumulative 4.2% against the US dollar, and in October it appreciated by about 0.8% to around 6.65 yuan. Since late October, the pace of appreciation has accelerated, with the onshore yuan exchange rate rising for 14 consecutive trading days starting from October 14, and the appreciation in the past two trading days both reaching around 100 points, breaking through 6.65 yuan on November 2.
The foreign exchange deposit reserve requirement ratio for financial institutions is an important macroprudential management tool in the foreign exchange market. Wen Bin, chief economist at China Minsheng Bank, explained that when the yuan exchange rate appreciates too quickly, the People's Bank of China can raise the foreign exchange deposit reserve requirement ratio to tighten domestic US dollar liquidity and ease the pressure of yuan appreciation; when the yuan exchange rate depreciates too quickly, it can lower the foreign exchange deposit reserve requirement ratio to ease the pressure of yuan depreciation.
Historically, the People's Bank of China has adjusted the foreign exchange deposit reserve requirement ratio multiple times. In 2021, the central bank raised it twice to 9%; from 2022 to 2023, the central bank lowered it three times to the current 4%. "This increase in the foreign exchange deposit reserve requirement ratio will help promote a balance between supply and demand in the foreign exchange market and break the self-fulfilling expectation of yuan appreciation," Wen Bin said, adding that raising the foreign exchange deposit reserve requirement ratio is an open and transparent market-based measure, and this adjustment sends a policy signal to the market that the central bank will stabilize market expectations and keep the yuan exchange rate basically stable at a reasonable and balanced level.
After the announcement, the offshore yuan exchange rate against the US dollar fell immediately, breaking through the 6.65, 6.66, and 6.67 thresholds in succession; the onshore yuan exchange rate against the US dollar also declined in tandem. Data from the China Foreign Exchange Trade System showed that as of 16:30, the onshore yuan spot exchange rate against the US dollar closed at 6.6765, down 307 basis points from the previous trading day.
Recently, the People's Bank of China released its policy stance on the yuan exchange rate, clearly stating that the focus is on preventing large short-term exchange rate fluctuations, especially sharp short-term depreciation, from affecting financial stability. Ming Ming, chief economist at CITIC Securities, believes that the People's Bank of China's decisive move at this time will, on the one hand, freeze about US$20 billion to US$25 billion in foreign exchange liquidity at the banking level and promote a balance between supply and demand in the domestic foreign exchange market; on the other hand, it will also help break excessive one-sided speculation on exchange rate appreciation by some entities and stabilize market expectations.
This policy adjustment is consistent with the policy stance previously released. The People's Bank of China does not preset a target level for the exchange rate, but if the exchange rate fluctuates sharply in the short term and the market shows a "herd effect" and irrational expectations, it will introduce market-based measures to prevent short-term disruptive overshooting of the exchange rate.
Experts believe that in the past two years, China's trade surplus has been relatively large, and corporate settlement demand has continued to be released, which is the main reason for this round of yuan exchange rate appreciation. In the future, the trend of the yuan exchange rate still faces considerable uncertainty. Enterprises should adhere to the concept of risk neutrality, and there is no need to follow the trend in foreign exchange settlement, let alone speculate in foreign exchange.
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