BOFIT Viikkokatsaus / BOFIT Weekly 2018/32

Recent weakening of the Chinese currency has forced the People's Bank of China to reinstate its reserve requirement for financial institutions trading foreign-exchange forwards, effective August 6. The 20 % forex reserve requirement was first introduced in October 2015 to deal with another yuan depreciation episode. The requirement was lifted in September 2017.

The forex reserve requirement makes currency trading more expensive, thereby discouraging speculation on yuan depreciation. Since the beginning of June, the yuan had lost about 6 % of its value against the dollar. Since its peak in the end of March this year, the yuan has lost nearly 9 % of its value. The latest round of yuan depreciation reflects both the relative strength of the dollar and the narrowing of the interest-rate spread between the United States and China. While US interest rates are rising, the Chinese government has moved ahead with policy stimulus measures in the face of increased uncertainty. The yuan's real effective (trade-weighted) exchange rate is down by about 4.5 % since the beginning of June.

China's currency reserves grew in July by 6 billion dollars to 3.12 trillion dollars. Yet, even with net increases in both June and July, China's currency reserves are down by 22 billion dollars for the year.