People’s Bank of China Ditches Reserve Policies, Yuan Drops

Eliminating the reserve ratio makes it easier for traders to bet against the yuan.
Steven LernerOct 12,2020,21:08

The yuan plummeted on Monday after the People’s Bank of China (PBOC) scrapped reserve requirements to stabilize interest in its currency.

After achieving a 17-month high last week and rallying 6% against the dollar in the last six months, the yuan fell about 1% by the end of trading hours.

The U.S. dollar gained steam as investors remained hopeful for potential fiscal stimulus.

The PBOC eliminated a rule that forced financial institutions to maintain a 20% forex risk reserve ratio when conducting forward contracts with clients.

A statement on the PBOC website said that it will “keep the RMB exchange rate basically stable at an adaptive and equilibrium level,” according to CNBC.

Monday was the first day that institutions could avoid dealing with the reserve ratio requirement.

The PBOC enacted the rule two years ago when the yuan was struggling to compete with the dollar.

Eliminating the reserve ratio makes it easier for traders to bet against the yuan and short it.

There were many reasons why investors have been attracted to the yuan in 2020. China’s central bank has bucked global trends around by maintaining its current interest rates. By contrast, the U.S. Federal Reserve has lowered rates close to zero.

China’s economy has appeared to recover from the pandemic better than other major economes.

Recently, polls showing that Joe Biden could win the White House have also favored the yuan because Biden is less likely to be as tough as President Donald Trump on China. The back-and-forth stimulus negotiations in recent weeks have stymied the dollar.

Overall, the yuan has benefited throughout 2020 due to more stable conditions. But with this new policy, investors may want to think twice about China’s currency.