The central bank of China said on Monday it will reinstate foreign exchange risk reserves for some forwards contracts in order to slow the pace of recent depreciation.
On September 28th, the People's Bank of China PBOC said it would raise foreign exchange risk reserves for financial institutions when buying FX through currency forwards to 20 per cent from the current zero.
The move to resume FX risk reserves would effectively raise the cost of shorting the yuan at a time when the local currency is facing renewed depreciation pressure, traders and analysts said.
The yuan has been hit by a combination of broad dollar strength, China's wobbly economy and an easier monetary bias adopted by authorities to prop up growth.
The downturn in the Chinese currency has picked up speed after the PBOC lowered its key interest rates in August to further widen its policy stance from other major economies that are raising rates aggressively.
Since August of this year, the yuan has fallen more than 4 per cent to the dollar, breaching the psychologically important 7 per dollar level, and is on course for its biggest annual loss since 1994, when China unified official and market exchange rates.
Over the last few months, authorities have stepped up efforts to contain yuan weakness by persistently setting firmer than expected midpoint fixings, verbal warnings and holding off immediate easing moves.
In October 2020, China's central bank scrapped the risk reserve requirements when the yuan rose sharply.