Currency Wars Return: China Hikes FX Reserve Ratio For First Time In 14 Years In Bid To Weaken Yuan

The signs were clear last Thursday when China's PBOC held an unexpected, improvised meeting with major forex market players after which the central bank published a vague if ominous-sounding statement that the yuan exchange rate "can’t be used as a tool to stimulate exports via depreciation nor to offset impact of rising commodity prices via appreciation." While many had been looking in the rearview mirror, discussing the recent surge in the yuan, and speculating that the PBOC meeting was merely a warning from Beijing that the mercantilist nation (which in recent years has specialized in exporting deadly viruses in the pursuit of a grand reset) wouldn't look too fondly on more appreciation...

... the reality is that the PBOC's verbal jawboning against a stronger yuan (and by extension, against a weaker dollar) was a warning for more tangible action on Tuesday, when shortly after the offshore Yuan spiked above 6.36 a little after 4 am ET, the PBOC unexpectedly announced that for the first time in 14 years, it would hike the required-reserve ratio on foreign currency deposits at financial institutions from 5% to 7% effective from June 15, in an attempt to slow the yuan's appreciation, in line with official rhetoric.

This was the first FX RRR hike since May 2007, after its appreciation following yuan reform in 2005.

Banks will now have to hold extra dollars with the PBOC instead of making loans or selling the dollars for yuan in the interbank market, with the latter likely to pressure the PBOC to absorb it in the form of funds outstanding for foreign exchange. The central bank may be reluctant to do that in order to avoid explicit FX intervention and unnecessary yuan liquidity injections in exchange.

According to Bloomberg's David Qu, "deploying a tool rarely used underscores the authorities’ determination to maintain yuan stability, a crucial factor for external trade. It signals the authorities are becoming less tolerant of yuan gains and have started to act, after verbal interventions."

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