Renminbi slides against US dollar on reserve move

The renminbi slid on Friday after the monetary authorities asked banks to increase reserves of foreign currencies, which is expected to slow the Chinese currency's rise in the near term, according to experts.

The People's Bank of China, the nation's central bank, requires financial institutions to lift the reserve requirement ratio for foreign currency deposits, from 7 percent to 9 percent, starting from Wednesday, said a statement on Thursday.

That was the second time the central bank asked financial institutions to increase their foreign currency reserves, a measure to rein in the appreciation pressure of the renminbi. Economists estimated that the 2 percentage-point increase is likely to freeze about $20 billion in the supply of foreign exchange.

The central bank's announcement came one day after the renminbi rallied to 6.35 yuan per dollar, its strongest level against the US currency since May 2018.

China's robust exports, which account for about $300 billion of capital inflows per month, and the remarkable foreign investment into the onshore capital market have driven up the renminbi, according to Stephen Chiu, chief Asia foreign exchange and rates strategist of Bloomberg Intelligence.

The renminbi's central parity rate, or the daily trading reference, weakened to 6.3702 per dollar on Friday, compared with 6.3498 on Thursday. The offshore renminbi fell to 6.3839 against the dollar late on Thursday, the lowest level since Nov 30.

Through this foreign exchange reserve ratio hike, the supply of the US dollar and other foreign currencies could be reduced, so the appreciation pressure of the renminbi will be eased, said Wen Bin, chief analyst at China Minsheng Bank. A similar increase by the central bank was in June, which was the first since 2007.

It sends a signal that the central bank would like to stabilize the renminbi's exchange rate at a reasonable level and "two way" fluctuations will be a normal situation in the coming months, he added.

A fast rise of the renminbi may put more pressure on China's exporters and weaken their competitiveness in the global market, especially for smaller businesses, Wen said.

The central bank's move may slow the renminbi's rise in the near term, but it will be hard to derail its possible outperformance in 2022, as long as the pandemic situation remains somewhat unchanged, Chiu said.

"The hike itself is not surprising given the warning from China's Foreign Exchange Market Self-Discipline Mechanism on Nov 18," he added. "The actual hike came later, possibly to make way for the reserve requirement ratio cut on Dec 6."

Meanwhile, the central bank is continually promoting RMB internationalization through supporting the development of the Hong Kong Special Administrative Region as an international financial center.

The digital RMB, or e-CNY, is undergoing a cross-border payment test jointly conducted by the central bank and the Hong Kong Monetary Authority, Mu Changchun, director-general of the central bank's Digital Currency Institute, said on Thursday.