Beijing takes its most visible measure yet to curb yuan’s gain

China forced banks to hold more foreign currencies in reserve for the first time in more than a decade, its most substantial move yet to rein the surging yuan.
The nation’s financial institutions will need to hold 7% of their foreign exchange in reserve from June 15, according to a central bank statement yesterday. That’s an increase of 2 percentage points, and the first such hike since 2007. The move, which the People’s Bank of China said will help liquidity management, effectively reduces the supply of dollars and other currencies onshore – putting pressure on the yuan to weaken. The Chinese currency fell 0.2% at 5:42 p.m. in Hong Kong yesterday.
Although analysts said the direct impact may be small, the move is the clearest signal by the PBOC that it’s unhappy about the yuan’s surge to a three-year high against the greenback. Authorities had until now limited their response to rhetoric: a former central bank official and a state-media commentary talked down the currency over the weekend.
“The PBOC wants to show the market – if the rally keeps going, it has many measures to slow it down and the market will fail if it wants to make speculative bets,” said Zhou Hao, an economist at Commerzbank AG in Singapore.
Betting on the yuan has been a successful strategy in the past year. MDT/Bloomberg