To strengthen the management of foreign exchange liquidity at financial institutions, the People's Bank of China has decided that, starting from November 15, 2026, it will raise the foreign exchange deposit reserve requirement ratio for financial institutions by 2 percentage points, lifting it from the current 4% to 6%.
What does this policy mean? In one sentence: it shatters the one-way currency appreciation illusions of some market participants. So what exactly is the foreign exchange deposit reserve requirement ratio? It is a macroprudential policy tool. When banks take in foreign currency deposits, they must deposit a certain proportion of that foreign exchange with the central bank, and that proportion is the foreign exchange deposit reserve requirement ratio. In other words, when a bank absorbs U.S. dollar deposits, it must hand over a share to the central bank to be "stored" and cannot freely use it in the market. After this increase, banks must deposit an additional 2 percentage points with the central bank for every unit of foreign exchange deposits they absorb. This reduces the foreign exchange positions they can deploy, which in turn shrinks the supply of U.S. dollars in the spot market. That helps slow the pace of too-rapid renminbi appreciation and weakens speculative expectations of a one-way renminbi rise, preventing companies and residents from rushing to convert foreign exchange in a herd and betting on one direction for the exchange rate.
The general rule is that when expectations of renminbi depreciation are strong, the foreign exchange deposit reserve requirement ratio is lowered, and when expectations of renminbi appreciation are strong, it is raised. Why did the central bank "step in" at this time? This move is precisely intended to break the one-way currency appreciation illusions of some market participants. Data show that since the beginning of 2026, the renminbi exchange rate against the U.S. dollar has continued to appreciate. In the first nine months, it rose by a cumulative 4.2%, 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 renminbi exchange rate rising for 14 consecutive trading days starting from October 14, and in the last two trading days the appreciation was around 100 points each day. This increase in the foreign exchange deposit reserve requirement ratio will help promote balance between supply and demand in the foreign exchange market and break the self-fulfilling nature of renminbi appreciation expectations.
A very common question is: if the exchange rate "rises," isn't that a good thing? To answer that, one must first distinguish "good for whom, good to what extent, and how fast the rise is." Renminbi appreciation means the same amount of renminbi can be exchanged for more U.S. dollars. For those studying abroad, traveling overseas, consuming imported goods, or holding U.S. dollar liabilities, purchasing power becomes stronger and costs decline, so it is indeed a good thing. But for exporting companies, the same U.S. dollar income converts back into fewer renminbi, squeezing profit margins. For companies and residents holding U.S. dollar assets, book-value conversion also changes. During periods of renminbi appreciation, some companies report exchange losses in their financial statements. Therefore, a "rising" exchange rate is not beneficial to everyone, and it certainly cannot be summed up simply as a "good thing."
More importantly, an exchange rate is never better simply because it rises faster. Recently, as the renminbi has appreciated, one-sided bullish sentiment toward the renminbi has become increasingly dense in the market, making it easy for the trend to "overshoot." If companies and residents concentrate on converting foreign exchange and make one-sided bets on the exchange rate, that will reinforce speculative expectations of a one-way renminbi appreciation and create a "herd effect." Once fundamentals or the external environment change and the exchange rate moves in reverse, this will instead magnify corporate costs and risks to household assets. The central bank's increase in the foreign exchange deposit reserve requirement ratio this time is precisely intended to stabilize market expectations, maintain the smooth operation of the foreign exchange market, and prevent destructive short-term overshooting of the exchange rate.
How should this policy be understood? From the perspective of policy signals, the central bank's decisive move at this time will freeze about US$20 billion to US$25 billion in foreign exchange liquidity at the banking level, promote balance between supply and demand in the domestic foreign exchange market, and also help break the one-way currency appreciation illusions of some market participants, stabilize market expectations, effectively curb irrational market expectations, and prevent destructive short-term overshooting of the exchange rate. From the perspective of exchange rate fundamentals, this round of renminbi appreciation has support, but it is not a one-way market. On the one hand, China's trade surplus has been relatively large over the past two years, and corporate demand for foreign exchange settlement has continued to be released, which is the main reason for this round of renminbi appreciation. On the other hand, the trajectory of the renminbi exchange rate still faces considerable uncertainty, and there are also many factors that could push the renminbi lower in the future: the current inverted China-U.S. interest rate spread remains at a historically high level, and the market expects the Federal Reserve to continue raising rates by the end of this year and next year, so the inverted spread may widen further. In addition, rate hikes may drag on economic growth in major developed economies, the high growth rate of capital expenditure in the global artificial intelligence sector will be difficult to sustain, external demand may decline next year, and the export situation faces uncertainty. In other words, the trade surplus and foreign exchange settlement demand provide support for the renminbi exchange rate, but reverse factors such as the inverted interest rate spread, geopolitical conflicts, and weakening external demand coexist. The trajectory of the renminbi exchange rate still faces significant uncertainty, and one should never bet on a one-way move in the renminbi.
For the market, the central bank's signal is clear: the exchange rate is not a wager on a one-way market, and stable operation is the long-term way to protect the wallets of millions of households. Companies should still adhere to the concept of risk neutrality. There is no need to follow the crowd in converting foreign exchange, and even less to speculate in foreign exchange. Previously, during the period of renminbi appreciation, some companies reported exchange losses in their financial statements, which in fact were "paper losses." In response, companies should use foreign exchange derivative instruments to hedge the impact of exchange rate fluctuations, and may also choose suitable foreign currency wealth management products for investment. Only by adhering to risk neutrality can one achieve steady and long-term progress.
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