China Acts To Rein In Yuan Slump

The central bank on Monday announced steps to slow the pace of the yuan's recent depreciation by making it more expensive to bet against the currency.

The People's Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20 percent from the current zero, starting on September 28.

In explaining its actions, the PBOC said it is "stabilising FX market expectations and strengthening macro prudential management", according to an online statement.

The move to resume FX risk reserves would effectively raise the cost of shorting the yuan at a time the local currency is facing renewed depreciation pressure, traders and analysts said.

Over recent months, authorities have stepped up efforts to rein in yuan weakness through persistently setting firmer-than-expected midpoint fixings, verbal warnings and holding off immediate easing moves.

The yuan has slumped more than 4 percent to the dollar since mid-August to breach the seven-per-dollar level, and is on course for its biggest annual loss since 1994, when China unified official and market exchange rates.

The currency has been hit by a combination of broad dollar strength, the mainland's wobbly economy and an easier monetary bias adopted by authorities to prop up growth.

The downturn in the yuan has picked up speed after the PBOC lowered key interest rates in August to further widen its policy stance from other major economies that are raising rates aggressively.

Monday's announcement by the PBOC marks the latest policy measure to stem the currency after earlier this month it moved to lower the amount of foreign exchange that financial institutions must hold as reserves earlier. (Reuters)