(Yicai Global) April 26 -- China’s central bank will lower the amount of foreign currency banks need to hold as reserves to help support the Chinese yuan, which has weakened to a 17-month low against the US dollar.

The foreign exchange reserve requirement ratio will fall to 8 percent from 9 percent from May 15 to “improve the ability of financial institutions to use foreign exchange funds,” the People’s Bank of China said in a statement yesterday.

The cut will help boost forex supply in the market, balance foreign currency supply and demand, and help stabilize the yuan exchange rate and market expectations after recent fluctuations, said Ming Ming, chief economist at Citic Securities.

Offshore yesterday, the yuan tumbled past 6.6 versus the greenback, hitting the lowest level since mid-November 2020. It was trading at 6.5715 per US dollar as of 8.15 a.m. today.

The yuan’s depreciation is mainly due to the divergence between monetary policies in China and the US, the Federal Reserve’s rate hike plans, and a surge in the US Dollar Index beyond 100, according to Yang Delong, chief economist at First Seafront Fund.

The central bank raised the foreign exchange reserve ratio on two occasions last year by 2 percentage points each time in June and December. 

The stronger US dollar also has caused depreciation among other currencies such as the Japanese yen, which has shed 10 percent versus the dollar since early March and hit a 20-year low last week.

Compared with the yen, the yuan has been firmer against the greenback, mostly because of the resilience of China’s long-term economic growth, no fundamental change in its long-term positive trend, and the long-term value of yuan-denominated assets.

Judging by past experience, changes in Fed policy, especially interest rate increases, usually have spillover effects on other countries’ cross-border capital flows, Wang Chunying, deputy director of China’s State Administration of Foreign Exchange, said at a press conference on April 22.

The most-effected economies are those with fundamental weaknesses and flaws, Wang added, noting that China has the foundations and conditions to accommodate this round of Fed tightening because the resilience of the country’s forex market has been growing in recent years.

Two-way volatility is expected between the yuan and dollar this year, according to Pacific Securities. The redback will remain under pressure in the second quarter but is likely to stand firm at around 6.6, the brokerage added, noting that it may appreciate against the dollar in the second half. 

Editors: Liao Shumin, Futura Costaglione