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China central bank to cut foreign exchange reserve ratio to save Yuan

Amidst the highly volatile global economy and increasing chances of a global economic slowdown, the People’s Bank of China on Monday announced that it has decided to decrease the amount of mandatory Foreign exchange reserve to be kept by financial institutions.

The latest move by the people’s Bank of China is aimed at slowing down the depreciation of Yuan against the US dollar.

PBOC (People’s Bank of China) said that the reserve requirement ratio for foreign exchange has been reduced from 8% to 6%. The new rates and ratios will be in force from September 15th 2022. PBOC believes that the easing of the reserve ratio on the foreign exchange would help financial institutions and the sector, in general, to use foreign exchange capital more efficiently and effectively.

A reduction in foreign exchange reserve requirements in the country will result in more dollar circulation in the market. It will in the end lead to increased liquidity for the Greenback.

As the Yuan has been on the decline for the past few months and PBOC has been doing everything in its capacity to slow down the decline, the latest move by the Chinese central bank was expected by the market.

Market analysts and economists are of the view that the announcement about Foreign Exchange is a sign that PBOC is ready to devise and implement macro-prudential tools. The market can also expect the use of various monetary tools in the play by the Chinese central bank to straighten the economy of China.

Economic crisis and dominance of the US Dollar

The continuing dominance of the US dollar in the international exchange markets and increasing demand for the US Dollar have pushed down the Chinese Yuan to a 2-year low. The Chinese Yuan is currently trading at 6.93 per US dollar in the international market. The last Yuan was at this level on July 31st 2020. Since March 2020 the Yuan has depreciated by more than 2.5%.

It is also important to note that the Chinese economy has been going through unexpected shutdowns and disruptions in work for the past few months. The GDP growth rate which showed powerful resilience during the pandemic period and lockdown tumbled down as the impacts of the pandemic didn’t leave the economy as expected. Partial or complete shutdown of major industrial cities and economic power centres coupled with the ballooning crisis in the banking and real estate sector is hitting the domestic economy of the Asian giant very hard.

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