China's Central Bank Cuts Forex Risk Reserve Ratio to Zero

In a significant move to support businesses amid the backdrop of yuan appreciation, the People's Bank of China (PBC) has announced a reduction in the foreign exchange risk reserve ratio for forward foreign exchange sales from 20 percent to zero, effective immediately. This decision marks the first deployment of this counter-cyclical tool by the PBC in over three and a half years.

Market analysts view this policy shift as a proactive measure aimed at reducing costs for enterprises engaging in forward foreign exchange transactions. Additionally, it serves to stabilize market expectations in light of the rapid appreciation of the yuan observed in recent months.

The PBC's latest initiative is indicative of its balanced approach to economic policy, focusing on bolstering the real economy while simultaneously managing currency fluctuations within a challenging external environment. In its Friday announcement, the central bank outlined its intention to enhance the development of the foreign exchange market and better support businesses in navigating exchange rate risks.

The revision eliminates the requirement for banks to reserve funds for forward foreign exchange sales, ultimately leading to lower costs for companies. For instance, banks previously had to freeze $20 with no interest for every $100 in forward foreign exchange sold. By reducing this reserve requirement to zero, the PBC alleviates the financial burden on enterprises engaging in currency procurement.

Experts, including Wen Bin, chief economist at China Minsheng Bank, affirmed that this policy adjustment effectively diminishes the costs associated with managing exchange rate risks, enabling more enterprises to utilize forwards for hedging.

Moreover, the foreign exchange risk reserve ratio, a macro-prudential regulatory measure introduced after the exchange rate reform of August 2015, had been reinstated to 20 percent in September 2022 to stabilize market expectations. Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, noted that the recent amendment sends a clear policy signal aimed at countering the yuan's recent appreciation.

Since the beginning of 2026, the yuan has seen an increase against the US dollar, with both onshore and offshore rates growing by 2 percent year-to-date. The offshore yuan, particularly, has demonstrated rapid appreciation, surpassing 6.82665 against the dollar on February 26, following the PBC’s announcement.

Subsequent to the announcement, the offshore yuan experienced a drop of more than 100 basis points against the US dollar, reverting to levels around 6.85. Analysts suggest that continued strengthening of the yuan may prompt the PBC to deploy other stabilization tools, potentially emphasizing daily adjustments to the central parity rate.

Wen expressed that the PBC's action serves as a measured 'cooling' signal to the market's expectations for further yuan strength, reaffirming the central bank's overarching objective of maintaining a stable yuan exchange rate.

Yang Delong, chief economist at First Seafront Fund, attributed the yuan's recent gains to factors like a weakening US Dollar Index, evolving China-US trade relations, improving domestic demand, and a stabilizing capital market. He highlighted that advancements in critical sectors like robotics and semiconductors are drawing global interest towards Chinese assets, thereby attracting cross-border capital inflows.