China cuts banks foreign reserve requirement ratio to support yuan

The PBOC previously raised the FX reserve ratio for financial institutions by 200 basis points in December 2021, to rein in a rising yuan and make it more expensive for banks to hold dollars

China's central bank said on Monday it would cut the amount of foreign exchange banks must hold as reserves, a move aimed at slowing the depreciation of the yuan, which is at its weakest levels in a year.

The People's Bank of China said it would cut the foreign exchange reserve requirement ratio (RRR) by 100 basis points (bps) to 8% beginning May 15, to "improve financial institutions' ability to use foreign exchange funds", according to an online statement.

The PBOC previously raised the FX reserve requirement ratio for financial institutions by 200 basis points in December 2021, to rein in a rising yuan and make it more expensive for banks to hold dollars.

The cut in foreign exchange reserve ratios is expected to lend the tightly managed currency some support, by freeing up dollars banks need to maintain with the central bank.

The yuan has fallen furiously, shedding more than 3% against the dollar in the past month and hitting a one-year low of 6.5775 on Monday, on concerns over a worsening economic growth outlook caused by strict COVID-19 lockdowns in Shanghai and major cities and the loss of a yield advantage versus the dollar.

Marco Sun, chief financial market analyst at MUFG Bank, said recent sharp losses in the yuan have de-coupled from China's economic fundamentals and prompted the authorities to roll out measures to prevent it from falling further.

"Market participants who see the cut as a signal from policymakers would likely to dial back on the short positions on the CNY and CNH," Sun said.

Sun expects the yuan to trade in a range of 6.35 to 6.55 per dollar following the adjustment while noting the U.S. Federal Reserve's anticipated rate hike in May could limit the yuan recovery.

The spot yuan pared losses following the PBOC announcement, with both onshore and offshore yuan strengthening about 300 pips to 6.5395 and 6.5698 per dollar, respectively.

Both the onshore and offshore yuan had their worst weeks since 2015 last week. The growth worries also forced Chinese stocks on Monday into their biggest slump since the pandemic-led panic-selling of February 2020.

(Reporting by the Beijing Monitoring Desk; Editing by Edmund Blair and Bernadette Baum)