(Yicai Global) Sept. 6 -- The yuan will stabilize after the People’s Bank of China said it will lower the reserve requirement ratio for foreign currency deposits at banks for the second time this year, according to economists.

The PBOC aims to boost foreign exchange liquidity, regulate supply and demand in the forex market, and help stabilize the yuan on markets, said Lian Ping, chief economist at the research institute under ZhiXin Fund.

The move will also help restrain expectations of a further depreciation, showing that the monetary authorities will take steps to keep the yuan basically stable, Lian added.

The central bank said yesterday that it will cut the RRR for foreign currency deposits to 6 percent from 8 percent on Sept. 15 to bolster foreign currencies management at financial institutions, after the yuan touched a two-year low against the US dollar.

The PBOC trimmed the ratio to 8 percent from 9 percent on May 15, lowering it for first time in 17 years. Economists predicted that yesterday’s cut would release about USD19.1 billion of liquidity.

The latest more was bigger than May’s cut, but the amount of liquidity it will release is still reasonable, according to Lian.

The lower ratio will lift foreign exchange liquidity in the banking system, increase the supply of foreign currencies, and promote market balance, said Zhou Maohua, a financial markets researcher at China Everbright Bank. It also signals the market to steer clear of irrational fluctuations, he said.

The yuan has depreciated more than 9 percent versus the dollar this year, while the dollar has more broadly climbed 15 percent in global forex markets after the US Federal Reserve began to hike interest rates. The yuan traded onshore closed at 6.9366 against the dollar yesterday, weakening 338 basis points after touching 6.9430, a record low since August 2020.

The Fed began to raise rates in April, with an initial increase of just 25 basis points, so the US dollar index had a limited impact on the yuan exchange rate, Lian said. But the Fed has raised the cost of borrowing by 225 bps to now, pressuring the yuan. In turn, the PBOC has lowered the forex RRR, he said.

China has gotten the pandemic under control and brought out policies to underpin a steady economic recovery, Zhou said, noting that supply chains are running smoothly again, the foreign trade structure has improved, the value in investing in yuan-denominated assets is prominent, the balance of payments will remain basically balanced, and the yuan exchange rate has become significantly more resilient.

The yuan is expected to trade near the equilibrium level, and two-way fluctuations will become the norm, according to Zhou.

Editor: Futura Costaglione