China Defends Yuan... Verbal Intervention Following Reserve Requirement Ratio Cut

Deputy Governor of the People's Bank of China: "We Have the Strength to Support Foreign Exchange Market Stability"
State Council of China to Inject 800 Billion Yuan Liquidity for Economic Growth in Q3-Q4

[Asia Economy Senior Reporter Cho Young-shin] As the value of the yuan plummeted, Chinese foreign exchange authorities intervened in the market by lowering the foreign currency deposit reserve ratio (reserve ratio) by 2 percentage points. This is interpreted as a message from Chinese financial authorities that they will not allow the 'Poqi (破七, the 7 yuan per dollar level)'.

[Image source=Yonhap News]

According to Chinese economic media Caixin and Japan's Zaijitsu Zaikei on the 6th, the People's Bank of China, the central bank, will lower the foreign currency reserve ratio from the current 8% to 6% starting from the 15th, a 2 percentage point cut. The People's Bank explained that the reserve ratio is being lowered to enhance financial institutions' ability to manage foreign currency funds.

The foreign currency reserve ratio is the amount of foreign currency that financial institutions are required to hold compulsorily. When the foreign currency reserve ratio is lowered, the circulation of dollars in the market increases. It is expected that $19.1 billion (about 26.2 trillion KRW) will be released into the market due to this reserve ratio cut.

Chinese authorities adjust the exchange rate through the foreign currency reserve ratio. When the yuan's value and Chinese stocks plunged due to the Shanghai lockdown in April, the People's Bank lowered the foreign currency reserve ratio from 9% to 8%, a 1 percentage point cut. This is the second cut this year.

Following the news of the foreign currency reserve ratio cut, the yuan closed at 6.9366 per dollar, down 3.38 percentage points from the previous trading day.

Lianping, Chief Economist at Zhixin Investment Research Institute, said, "This move is a clear policy signal from the authorities to market participants that they will not stand by and watch the yuan's value decline."

Zhou Maohua, a researcher at Guangda Bank, explained the background of the reserve ratio cut, saying, "The yuan's depreciation is linked to concerns about U.S. inflation and worsening economic outlook in Europe. The foreign currency reserve ratio cut is to prevent irrational fluctuations in the foreign exchange market."

Zaijitsu Zaikei projected that as of the end of July, China's foreign currency deposit balance totaled $953.7 billion (1,336 trillion KRW), and the 2 percentage point cut in the foreign exchange reserve ratio will release $19.1 billion in liquidity.

Chinese financial authorities also made verbal interventions to prevent the yuan's depreciation.

On the previous day, Liu Guochang, Deputy Governor of the People's Bank of China, attended the State Council's economic stability policy briefing and emphasized, "A reasonable balance and stability in the foreign exchange market are important," adding, "We (the People's Bank) have the strength to support foreign exchange market stability." He further explained that while the yuan exchange rate is influenced by various factors, it is less depreciated compared to other non-dollar currencies.

Regarding further cuts to the Loan Prime Rate (LPR, China's benchmark interest rate), Deputy Governor Liu said, "Since each country has different economic fundamentals and financial environments, monetary policies should differ as well," and stated that China currently has many monetary policy tools available and sufficient room to use policies.

Chinese media such as Caixin reported that from the beginning of this year to August, the euro fell by 12%, the pound by 14%, and the yen by 17%, while the yuan fell by about 8%. This indicates that the volatility is relatively smaller compared to other international currencies.

Zhong Zhengsheng, Chief Economist at Ping An Securities, explained the background of the yuan's depreciation, saying that the strong tightening stance of the U.S. Federal Reserve, economic uncertainties in Europe, and the slow recovery of the Chinese economy combined to push up the dollar's value, causing other currencies' values to fall accordingly.

There are also claims that there is no need to worry much even if the yuan exchange rate enters the 7 yuan per dollar range.

Luo Zhiheng, Chief Economist at Yuekai Securities, said, "Concerns about breaking through 7 yuan are more psychological than actual risks," adding, "After breaking through 7 yuan in September 2019 and May 2020, the yuan soon strengthened."

Meanwhile, the Chinese State Council held a second-half economic stability policy briefing attended by Yang Yinkai, Deputy Secretary-General of the National Development and Reform Commission, Liu Guochang, Deputy Governor of the People's Bank of China, Ou Yuanhan, Deputy Minister of Finance, and Li Fei, Deputy Minister of Commerce. They announced that 800 billion yuan will be invested in infrastructure to boost economic growth in the third and fourth quarters, with 300 billion yuan from the central government and 500 billion yuan from local governments.

This content was produced with the assistance of AI translation services.