China’s central bank on Monday told banks to increase the amount of foreign currency deposits held in their reserves for the first time in more than a decade to stem the recent surge in the renminbi.

The nation’s financial institutions must now maintain so-called foreign exchange reserve ratios at 7% of their forex deposits from June 15, from 5% now, the People’s Bank of China said in a statement. The ratio was last changed in May 2007, when it was raised from 4%.

Raising the ratio forces banks to place more of their forex with the central bank. This decreases their ability to speculate against the Chinese currency; it also means selling renminbi on the offshore market to meet demand for foreign currencies at home.

Raising the deposit ratio will put pressure on the supply of U.S. dollars in mainland China’s banking system, said Stephen Chiu, the Asia Forex and Rates Strategist at Bloomberg Intelligence, noting that the move showed the central bank’s determination to curb short-term rapid appreciation in the yuan.

About US$20 billion in foreign currencies would be affected by the measure, according to analyst estimates.

The yuan weakened 0.2% against the U.S. dollar to 6.3668 from 6.3525 in Hong Kong on Monday. Onshore, the currency also fell nearly 100 points to 6.3662 yuan to the dollar.

State-run media have described the recent surge in the Chinese currency as “speculation-fueled,” adding that the rally “has sparked worry among policymakers and analysts.” A stronger currency makes China’s exports less competitive, as well as inflating the relative value of domestic assets.

Monday’s move indicated that “the central bank won’t allow the yuan’s rapid rise to go unchecked and will step in when necessary,” Guan Tao, BOC International’s global chief economist, told the state-run Global Times tabloid.

The central bank’s move aimed at limiting the ability of financial institutions to speculate in the renminbi, said Nathan Chow, a senior economist at DBS Hong Kong.

Chow believed that although the yuan would stabilize at the current level, there would be room for slight appreciation in the future. It would be down to 6.58 per U.S. dollar as the greenback strengthens in the third and fourth quarters, he said.

Weakness in the U.S. dollar saw the renminbi hit a three-year high early this month.

The “excessive” appreciation of the renminbi was due to “inappropriate remarks”, Sheng Songcheng, former director of the Survey and Statistics Department of the People’s Bank of China, told the official Xinhua News Agency on Sunday.

“We will prevent short-term speculative inflows of money from pushing up the yuan and diminishing the competitiveness of export firms,” Sheng said.

Click here for Chinese version

---------------------------------

Apple Daily’s all-new English Edition is now available on the mobile app: bit.ly/2yMMfQE

To download the latest version,

iOS: bit.ly/AD_iOS

Android: bit.ly/AD_android

Or search Appledaily in App Store or Google Play