(Yicai Global) June 1 -- The Chinese yuan paused its appreciation streak that had made the currency stronger than it has been for three years after the central bank announced a rare foreign exchange reserve requirement ratio hike, taking effect from June 15.

The People's Bank of China will raise the foreign exchange reserve requirement ratio for financial institutions to 7 percent from the earlier 5 percent to improve their forex liquidity management, the central bank announced yesterday.

The effects were immediate. After the statement, the offshore yuan softened by 160 bips against the US dollar, shortly after exceeding 6.35, the strongest for the redback since May 2018. The offshore yuan opened at 6.3705 per US dollar today, while the onshore yuan started at 6.3705.

Over the past few days, the renminbi has broken the four key levels of 6.4, 6.39, 6.38, and 6.37 onshore. Regulators have made several statements on the rapid appreciation to downplay market expectations.

The PBOC's latest move is significant. Before this, the central bank used to increase the ratio by 0.5 percentage points at most per time and was more commonly using other policy tools such as foreign exchange risk reserve ratios.

PBOC Is Cooling the Market, Experts Say

Securities professionals told Yicai Global that the PBOC is raising the ratio to control the forex supply and demand and to stabilize market expectations.

Since last year, the booming exports and the high inflow of US dollars in China have been pushing up the value of the renminbi, said Ming Ming, chief analyst at Citic Securities.

The PBOC’s move will help absorb the excessive US dollars in the domestic market and keep the yuan's exchange rate stable, Ming added.

The policy adjustment signals that the central bank will not allow the redback to appreciate too quickly, and will act decisively when necessary, said Guan Tao, chief economist at Bank of China Securities.

A sustained rally of the yuan may have a great negative impact on exporters since the effects of the Covid-19 epidemic on China's economy have not yet completely subsided, Guan added.

Editor: Emmi Laine, Xiao Yi