PBOC cuts forex ratio to further bolster RMB

China's central bank announced a cut to the foreign exchange reserve requirement ratio on Friday to boost onshore dollar liquidity, reinforcing the policy signal of safeguarding the overall stability of the renminbi's exchange rate.

Experts said that the People's Bank of China, the nation's central bank, is expected to keep a close eye on renminbi exchange rate movements and remain ready to roll out more measures to stabilize foreign exchange market expectations if needed.

The Chinese currency is likely to gain a firmer footing and even slightly appreciate against the US dollar in the rest of the year as a raft of policies lift growth expectations for the Chinese economy while the greenback's strength fades, they said.

Their comments followed a central bank statement on Friday that it would reduce the foreign exchange reserve requirement ratio by 2 percentage points to 4 percent on Sept 15, after the onshore renminbi weakened by more than 5 percent against the greenback in the third quarter amid a strong US dollar and domestic economic headwinds.

The ratio refers to the percentage of foreign currency deposits that commercial banks are required to hold as reserves. By cutting the ratio, the central bank would release about $16 billion in foreign exchange liquidity into the onshore market, experts said.

"The cut can boost the onshore foreign currency supply and help support the renminbi's exchange rate, which may fluctuate with a tendency to strengthen," said Ming Ming, chief economist of CITIC Securities.

Both the onshore and offshore renminbi both jumped against the US dollar on the move. The onshore renminbi hit 7.2360 per dollar on Friday morning, up 544 basis points from Thursday's close, though retreating to 7.2633 as of 4:30 pm.

Guan Tao, global chief economist at BOC International, said: "The cut has reinforced the policy signal of stabilizing the renminbi exchange rate delivered by the recent increased issuance of offshore renminbi government bonds and central bank bills, as well as the eased quota of corporates' foreign debt."

More policy tools, such as raising the cost for holding foreign exchange forward contracts and reintroducing the countercyclical adjustment factor, may be used if the renminbi depreciation pressure intensifies, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

"The tools for stabilizing the foreign exchange market remain abundant," Wang said.

The central bank vowed to "firmly forestall" the risk of the exchange rate overshooting by adopting comprehensive measures and taking market supply and demand as the basis in its quarterly monetary policy report released in August.

Wang Tao, head of Asia economics at UBS Investment Bank, said the renminbi could still face some short-term depreciation pressures but may slightly strengthen against the US dollar by the end of the year as the greenback weakens.

Despite the short-term fluctuations, the renminbi is likely to remain relatively stable in the longer run as China's economy is expected to fare better than that of its major trade partners, said Wang, who expects China's 10-year average annual economic growth to exceed 4 percent, compared with about 2 percent for developed economies.

By virtue of its long-term value stability, the renminbi has been favored by some developing economies as an emerging international currency.

In Argentina, the first direct investment in the renminbi was conducted on Wednesday, whereby a Chinese energy firm invested 428,736 yuan ($59,055) into the local economy, Xinhua News Agency reported.