China reduces banks’ foreign exchange reserves in support of the yuan

SHANGHAI, Sept 5 (Reuters) – China’s central bank on Monday announced a reduction in the amount of foreign exchange reserves that financial institutions must hold at all times, a move seen as another attempt to rein in the yuan’s depreciation.

This ratio of compulsory foreign exchange reserves will thus be reduced from 8% to 6% from September 15, said the People’s Bank of China (PBC) in a press release published on the internet.

This decision aims to improve “the ability of financial institutions to use their capital in foreign currencies,” the statement added.

The yuan has lost 8% of its value against the US dollar since the start of the year and recently hit its lowest level in two years, a movement which can be explained by both the strength of the greenback on the global markets and the continued deterioration of China’s economic outlook.

Based on available data ending at the end of July, the reduction in reserves represents approximately 19 billion dollars (19.1 billion euros).

Several traders and analysts said the BPC’s announcement was expected and that it was intended, among other things, to impress on the markets that the rapid decline in the yuan was considered undesirable by the Chinese authorities.

The central bank had already cut the foreign exchange reserve ratio by 100 basis points in April. (Beijing office report, French version Marc Angrand, edited by Tangi Salaün)