(Yicai) Feb. 27 -- China’s central bank will cut the foreign exchange risk reserve requirement ratio for forward foreign exchange sales to 0 percent from 20 percent starting March 2, in a move aimed at supporting companies’ exchange rate risk management and promoting development of the forex market.

The move marks the second adjustment since the ratio was raised to 20 percent in September 2022. The reduction is widely seen as a signal to curb overly rapid yuan appreciation, as it lowers the cost for companies to lock in foreign exchange purchases and may increase demand for the US dollar in the forex market.

The People’s Bank of China announced the decision today, saying it will continue to guide financial institutions to optimize services that help enterprises hedge against exchange rate risks and maintain the yuan’s basic stability at a reasonable and balanced level. After the announcement, the yuan weakened against the US dollar at the market open, with the onshore yuan at 6.8609 per dollar compared with the previous close of 6.8413, and the offshore yuan at 6.8974 versus 6.8446 yesterday.

Forward foreign exchange sales are derivative products provided by banks to help enterprises hedge exchange rate risks by locking in future foreign exchange purchase costs. From Feb. 25 to Feb. 26, the yuan strengthened rapidly, with the onshore and offshore rates breaking past 6.87 and 6.84, respectively. The offshore yuan hit 6.82665 per dollar on Feb. 26, its highest level since April 2023. So far this year, both the onshore and offshore yuan have appreciated by around 2 percent against the US dollar, remaining strong after breaching the 7.0 mark at the end of last year.

According to Xinhua News Agency, Ming Ming, chief economist at Citic Securities, said lowering the ratio will reduce companies’ forward foreign exchange purchase costs, boost their willingness to hedge in foreign exchange purchases, and support the rational use of derivatives to manage exchange rate risks. He noted that the external environment remains complex and volatile, with considerable uncertainty surrounding the yuan’s trajectory, urging foreign trade firms to strengthen hedging.

Wang Qing, chief macro analyst at Golden Credit Rating International, said that if the yuan experiences sharp fluctuations that deviate from economic fundamentals this year, regulators will take decisive action to stabilize the forex market, including adjusting the central parity rate, and send clear policy signals. History has shown that such policy tools can effectively guide market expectations and prevent risks from exchange rate overshooting, he concluded.

Editor: Emmi Laine