(Yicai Global) Aug. 6 -- The yuan fluctuated wildly after the foreign exchange reserve requirement ratio came into force today. The central parity rate of the Chinese currency which China's central bank sets fell sharply against the dollar to hit a one-year low.
The redback rallied strongly versus its green counterpart onshore at market opening today, however.
The yuan-dollar central parity price slipped 191 points to 6.8513 today, the weakest point since May 31 last year. Onshore yuan opened at 6.8200 at 9.30 a.m. and soared 160 points to 6.8040 ten minutes later. On the offshore front, it rose by 200 points to 6.8255.
The People's Bank of China decided to raise the reserve requirement ratio for forward foreign exchange transactions from zero to 20 percent, effective today, the bank said Aug. 3. Forward foreign exchange sales and settlement is a currency-hedging derivative offered by banks that allows companies to hedge against future foreign-exchange related risks by buying forward positions.
Since companies do not purchase any currency upon execution of the transactions, but banks need to buy foreign exchange on the spot market, the transactions affect spot exchange rates and thus influence companies' forward foreign exchange positions.
The yuan has fallen to a 14-month nadir against the dollar onshore as the trade wrangle between the US and China has sharpened, Reuters news agency reported Aug. 3.
Imposition of the requirement ratio is unlikely to impact the yuan's spot exchange rates immediately, said Li Qilin, managing director and chief macro analyst with Lianxun Securities.
The reinstatement of the reserve requirement is now more symbolic than anything, and further policies may be introduced in future to stabilize exchange rates, Li added.
Editor: Ben Armour