China Will Raise Reserve Requirements On Offshore Yuan In An Effort To Stem Speculation

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Includes: CYB, UDN
by: Matthew Allbee

Summary

The People's Bank of China has announced it will be raising it's Reserve Requirement Ratio on Offshore Yuan Deposits.

Many believe this is in an effort to sop up excess supply that is being used in speculative bets for further Yuan depreciation.

China's efforts to stop further depreciation of the Yuan has eased fears that it may be allowing the falling currency to boost exports in a slowing economy.

According to Reuters, the Chinese central bank has announced that they will be increasing its reserve requirement ratio (RRR) on offshore yuan deposits "to a normal level" from 0, where it currently stands. This is widely believed to be an effort to soak up excess yuan supply that is being used in speculative bets against that the currency will depreciate in the future.

This change to the RRR, which is set to take effect on January 25th, has helped to push the U.S. dollar down 0.44% to 6.5849 against the yuan in the Hong Kong offshore market, and down 0.1% to 6.5783 in onshore markets.

The central bank has been struggling to prop up the yuan over the last year, which has fallen from a rate of $1 to about 6.15 yuan to its current position at around $1 to 6.58 yuan. China controls the exchange rate by setting a daily target in relation to the U.S. dollar from which the onshore yuan is kept within 2% of. Concerns have been mounting as to how long it will actually be able to keep control, as the country has been burning through its foreign reserves since 2014. (a chart of Chinese foreign reserves can be found here)

The yuan is generally considered to be above the value it would command in a free market. This inflated rate is maintained by Chinese manipulation, and the fact that Chinese authorities are now allowing it sink closer to its fair market value has many worried that they believe the Chinese economy is weaker than they are leading on. The fact that the People's Bank is now making an effort to hold the currency up at these levels is helping to calm these fears.

With China being the world's largest net importer of oil, this fear of a slowing economy has also been weighing on oil markets.

Disclosure: I am/we are long USD/CNH.

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