China Raises Foreign Currency Deposit Reserve Ratio to 6% to Slow Yuan’s Rise
Key Facts
The People’s Bank of China announced on November 3 that it would raise the reserve ratio for foreign currency deposits held by financial institutions by two percentage points, from 4% to 6%, with the change taking effect on November 15. The bank said the move aims to strengthen the management of financial institutions’ foreign currency liquidity. A Reuters calculation estimated that the adjustment would withdraw an additional $24 billion from the financial system. The announcement came as the yuan had reached its strongest levels since 2022, after rising more than 5% against the dollar since the start of the year. The implementation date creates a gap between the announcement of the measure and its introduction, while the currency’s exchange rate responded immediately to the news.
The yuan fell onshore by as much as 0.37% to 6.6728 per dollar after the announcement and was on track for its biggest daily drop since May 15, according to a Reuters report. The 6.6728 level was the currency’s weakest since October 23. The move marked an immediate retreat from a rally that had taken the yuan to its strongest level since 2022. On November 2, the dollar closed at 6.66866 yuan offshore, according to EL7 data. The central bank had lowered its yuan midpoint for a second consecutive day on the same day, to 6.7150 per dollar, 661 basis points weaker than the Reuters estimate.
Strong exports, large trade surpluses and companies converting large amounts of foreign currency into yuan have supported the currency, Reuters reported. Raising the reserve ratio aims to reduce the dollar liquidity available in the domestic banking system by requiring financial institutions to hold a larger share of foreign currency deposits as reserves. An analyst at MUFG said that absorbing some of this liquidity aims to "reduce the momentum of the yuan’s rise and prevent excessive one-way expectations." This does not mean, according to an ANZ analyst’s assessment cited by the Reuters report, that the market expects the upward trend to reverse; participants viewed the measure as potentially more symbolic. The central bank said the ratio adjustment strengthens the management of foreign currency liquidity at financial institutions.
The yuan management decision coincides with a decline in China’s activity indicators in October. The official manufacturing purchasing managers’ index was 49.3, compared with 50.1 in September and 49.8 in August, returning to contraction territory after the previous month’s rebound. The new export orders index fell to 48.7 from 50.0 in September, while the production index declined to 49.8 from 51.7, according to data reported by the Associated Press. The China Federation of Logistics and Purchasing attributed the weakness in manufacturing to a drop in overseas Christmas orders after September and weak domestic consumption following the National Day holiday. The federation said export orders and new orders for consumer goods contracted.
Weakness also extended to the non-manufacturing sector, where the business activity index was 49.7 in October, down 0.5 points from the previous month; a reading below 50 indicates contraction, according to the National Bureau of Statistics. The sector’s new orders index fell to 44.4, down 2.1 points, signaling softening demand. By contrast, the activity expectations index remained at 54.7, above the contraction threshold, despite falling 0.8 points from September. The bureau said non-manufacturing companies remained confident about market development. These readings highlight a divergence between the yuan’s rise, supported by exports and trade surpluses, and declining activity indicators and domestic and foreign orders.
The reserve ratio increase reverses a decision the bank made in September 2023 to cut it, in an effort at the time to halt the yuan’s rapid losses and limit capital outflows, Reuters reported. PBOC Deputy Governor Zou Lan said China remained committed to allowing the market a decisive role in determining the exchange rate, despite the bank’s intervention to moderate the pace of the currency’s rise. Trade remains a central backdrop to the yuan’s moves: the Associated Press noted that China’s trade surplus in 2026 could exceed the record $1.2 trillion recorded in 2025. The agency added that trade is likely to be on the agenda at an expected meeting between U.S. President Donald Trump and Chinese President Xi Jinping in mid-November on the sidelines of the APEC summit in Shenzhen. These trade forecasts remain tied to the course of exports and the surplus over the rest of the year.
Upcoming economic dates include the November consumer price index report, listed on the National Bureau of Statistics calendar for November 9 at 9:30 a.m. Beijing time. The calendar also lists the monthly purchasing managers’ index report for November 30 at 9:30 a.m. The PMI report is scheduled for after the new reserve ratio takes effect on November 15. The consumer price report, meanwhile, is due before that date, while the PMI report will provide a subsequent reading on activity during the month. These two upcoming releases remain among the Chinese data markets will monitor after the adjustment announcement.