China set to cut forward FX risk reserve ratio to zero

China's central bank announced on Friday that it will cut the foreign exchange risk reserve ratio for forward foreign exchange sales from 20 percent to zero, a move analysts say signals efforts to ease the rapid appreciation of the renminbi.

The adjustment, effective March 2, is aimed at "promoting the development of the foreign exchange market and supporting enterprises in managing exchange rate risks", said the People's Bank of China, the country's central bank.

A cut in the ratio reduces the funds that commercial banks are required to set aside when selling foreign exchange forward to clients. This lowers banks' costs and reduces expenses for enterprises seeking to lock in future foreign exchange purchases through forward contracts.

Following the announcement, both the onshore and offshore yuan fell against the US dollar, trading below 6.85 in the morning session. On Thursday, the offshore yuan rose above 6.83 against the greenback, its strongest level since early 2023.

The central bank vowed to continue to maintain the general stability of the RMB exchange rate at a reasonable and balanced level, while guiding financial institutions to optimize their services for enterprises to hedge against exchange rate risks.

"The cut shows that authorities have taken measures to stabilize the foreign exchange market, which is expected to ease the relatively fast appreciation of the RMB after the Spring Festival," said Wang Qing, chief macroeconomic analyst at Orient Golden Credit Rating.