MORGANABLE BUSINESS / MARKETS & MONEY
China’s yuan weakened against the US dollar on Tuesday after the People’s Bank of China (PBOC) announced a higher foreign-exchange reserve requirement for financial institutions.
Akure —
China’s yuan weakened against the US dollar on Tuesday after the People’s Bank of China (PBOC) announced a higher foreign-exchange reserve requirement for financial institutions.
The decision marks a clear effort to slow the currency’s rapid rise after months of gains. It also shows that policymakers are watching the pace of appreciation as closely as they monitor weakness.
The central bank said it would raise the foreign-exchange reserve requirement ratio by two percentage points, from 4 per cent to 6 per cent. The new rate will take effect on November 15, 2026.
The PBOC said the adjustment would strengthen the management of foreign-exchange liquidity held by financial institutions.
Following the announcement, the onshore yuan fell by as much as 0.37 per cent to 6.6728 per dollar.
That marked its weakest level since October 23 and put it on course for its sharpest one-day decline in six months.
The offshore yuan also weakened, reflecting the market’s immediate response to the policy change.
The move comes after the yuan recorded a strong run against the dollar. The currency has gained more than 5 per cent so far in 2026, making it one of Asia’s strongest-performing currencies this year.
Its advance has been supported by China’s export performance, a large trade surplus and companies converting more of their foreign-currency earnings into yuan.
WHY THE CENTRAL BANK ACTED
The reserve requirement determines how much of financial institutions’ foreign-currency deposits they must keep with the central bank.
When the PBOC raises the ratio, banks have less foreign currency available to lend, trade or use in other transactions. As a result, the measure can reduce the supply of dollars in China’s domestic financial system.
The PBOC estimated that the adjustment would withdraw additional foreign-currency liquidity from the financial system.
A Reuters calculation based on official foreign-exchange deposit data put the amount at about $24 billion. Banks will prepare before then.
Market analysts said the decision sends a message that officials are uncomfortable with the speed of the yuan’s recent rise.
China depends heavily on exports, and a rapidly strengthening currency can make goods produced in the country more expensive for overseas buyers.
Therefore, policymakers may prefer a gradual rise that does not weaken exporters’ price competitiveness.
EXPORTS AND CORPORATE CURRENCY SALES
China’s strong trade position has played a major role in the yuan’s performance. Healthy export receipts bring foreign currency into the country, while a large trade surplus supports demand for the local currency.
In addition, exporters often convert some of their dollar earnings into yuan to pay workers, suppliers and other domestic expenses.
The central bank’s latest action is intended to manage that pressure without directly reversing the broader market trend.
However, analysts cautioned that the higher reserve ratio may not be enough to remove the factors supporting the yuan.
Strong exports, trade surpluses and corporate currency conversions remain important sources of demand.
The policy also reverses an earlier step taken during a different period of pressure. In September 2023, the PBOC reduced the foreign-exchange reserve requirement from 6 per cent to 4 per cent.
At that time, officials wanted to support the yuan as it faced losses against the dollar and concerns about capital outflows.
A SIGNAL TO THE MARKET
The reserve-ratio increase is not necessarily a sign that China wants a weaker yuan over the long term. Instead, it suggests that officials want to prevent rapid gains from creating one-way expectations among traders and businesses.
Such expectations can encourage market participants to make similar bets, which may increase volatility.
Analysts at financial institutions said the measure could have more signalling value than lasting power.
They noted that the adjustment may slow the currency’s advance, but it is unlikely to change the main forces behind the yuan’s strength.
The market will therefore watch whether the PBOC follows the announcement with further steps.
The central bank also adjusted its daily reference rate for the yuan. On Tuesday, it set the midpoint at 6.7150 per dollar, weaker than market expectations, according to Reuters.
The midpoint is an important guide for trading in China’s onshore currency market, where the yuan is allowed to move within a set band around the official rate.
The weaker-than-expected fixing added to signs that policymakers are seeking to manage the pace of appreciation.
However, the PBOC has maintained that market forces should play a decisive role in determining the exchange rate. Deputy Governor Zou Lan repeated that position at a financial forum in Hong Kong on Tuesday.
WHAT HAPPENS NEXT
Investors will now assess whether the reserve requirement increase can cool the yuan’s momentum when it takes effect on November 15.
They will also monitor export figures, corporate currency settlements and changes in demand for the US dollar. These factors could influence the exchange rate in the weeks ahead.
For now, the market reaction shows that the PBOC’s announcement has had an immediate effect on trading.
Yet one weaker session does not establish a lasting change in direction. The yuan has recorded substantial gains this year, and the conditions behind those gains have not disappeared.
The central bank must balance several priorities. It wants to maintain orderly currency trading, protect financial stability and avoid sudden movements that could unsettle businesses.
At the same time, it must consider the effect of a stronger yuan on exporters and the wider economy.
The increase in the foreign-exchange reserve requirement gives the PBOC another way to influence dollar liquidity without announcing a direct exchange-rate target.
Its impact will become clearer after the new ratio takes effect. Until then, traders are likely to watch official guidance and economic data for signs of the central bank’s next move.
