China Central Bank to Cut Down Foreign Reserve Quantity to Stabilize Yuan

China's central bank announced on Sept 1 that it will reduce the amount of foreign currency that financial institutions must hold as reserves for the first time this year, in an effort to slow the pace of the yuan's recent depreciation.

According to an online statement, the People's Bank of China (PBOC) will reduce the foreign exchange reserve requirement ratio (RRR) by 200 basis points (bps) to 4% from 6% beginning September 15.

The move was intended to "improve financial institutions' ability to use foreign exchange funds," according to the PBOC.

According to traders and analysts, the FX RRR reduction should lower dollar funding costs in the interbank market and relieve downward pressure on the yuan.

But they added that the move was unlikely to reverse the downward trend of the yuan, seeing it as more of signal to markets that it was planning to lean harder against rapid yuan losses if needed.

The yuan is one of the worst-performing Asian currencies this year, down about 5 per cent against the dollar amid a sharp slowdown in China's economy and widening yield differentials with the United States.