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Summary of article:
The People’s Bank of China raised the foreign exchange deposit reserve ratio to 6% to prevent the rapid appreciation of the renminbi by tightening US dollar liquidity in response to pressure on the foreign exchange market due to an increase in foreign exchange settlements at the end of the year and a strong foreign trade surplus.
The RMB exchange rate has been trending strongly recently. In order to curb the rise of the RMB, in view of the exchange settlement wave coming at the end of the year, the People’s Bank of China suddenly announced at 8:40 on the 3rd, before the opening of the stock and foreign exchange markets, that starting from November 15, 2026, it will increase the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points to 6% from the current 4%.
On the 3rd, the central parity rate of the RMB against the US dollar was recorded at 6.7150, a slight decrease of 4 points from the previous trading day. The central parity rate of the RMB is formed from quotes from market makers in the inter-bank foreign exchange market based on the previous day’s spot closing price. It is considered an important indicator by the market to observe China’s official guidance on foreign exchange market expectations.
Last Friday (October 30), the onshore RMB closed at 6.6557 against the US dollar, returning below 6.66 for the first time in three and a half years. On the same day, the offshore RMB once rose above 6.65 against the US dollar, and once reached around 6.649 during the session.
Americafederal Reserve In September, an interest rate increase of 1% (0.25 percentage points) was announced. The US dollar index strengthened by more than 2% that month, but the RMB did not decline against the US dollar, but rather appreciated. In this regard, Sheng Songcheng, chairman of the China Chief Economist Forum Research Institute, pointed out that while China’s foreign trade surplus is much higher than the same period in previous years, the traditional interest rate diffusion channel of raising interest rates by the Federal Reserve has not caused significant fluctuations in the RMB exchange rate.
“China’s current exchange rate flexibility is essentially that the demand for foreign exchange settlement temporarily exceeds the interest rate differential pricing,” Sheng Songcheng said.
China’s merchandise trade surplus reached a record high of US$938.1 billion in the first three quarters of this year, according to data released by China’s General Administration of Customs. It is widely expected that China’s trade surplus will reach a new high this year.
China Caixin reported that since October, the appreciation of the RMB exchange rate against the US dollar has accelerated. The onshore RMB appreciated by about 0.8% against the US dollar, and the offshore RMB appreciated by about 0.9% against the US dollar. The appreciation rates in the last month were around 0.2% and around 0.1% respectively.
Caixin said centralized foreign exchange settlement is one of the factors that has accelerated the recent appreciation of the RMB. This is not only because market expectations are changing, but also because the peak of concentrated foreign exchange settlements at the end of the year is approaching. Strong exports have driven growth in corporate foreign exchange earnings, which naturally increases demand for foreign exchange settlements.
A Chinese bank foreign exchange trader said, “There are a lot of customers disposing of foreign currency right now, and the tide is normal”; “Now that the RMB continues to appreciate, customers are also nervous. Moreover, it is almost the end of the year, and companies need to process statements.”
The foreign currency deposit reserve ratio is the proportion of foreign currency deposits that financial institutions deposit with the central bank as per regulations. Increasing this ratio means that banks need to lock more foreign currency (primarily US dollars) in the central bank and that it cannot be used for lending or trading. Therefore, US dollar liquidity in China’s domestic market will tighten accordingly. भ
The direct impact of increasing the foreign currency deposit reserve ratio from 4% to 6% is on the U.S. The costs of shorting the dollar/longing the RMB are increasing, slowing the appreciation of the RMB. The main objective of the People’s Bank of China should be to make countercyclical adjustments to cool the recent strong RMB exchange rate and curb the flow of arbitrage funds.
After the above news was announced, the offshore RMB fell against the US dollar in the short term. However, since this measure has a limited impact on RMB liquidity within China, it is not expected to have a substantial impact on mainland stocks.
Summary FAQ
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The central bank announced that from November 15, 2026, the foreign currency deposit reserve ratio of financial institutions will be increased from 4% to 6%, equivalent to an increase of 2 percentage points, which will require banks to deposit more foreign currency with the central bank.
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The main reason is that the RMB has appreciated very rapidly recently, and the demand for foreign exchange settlement will increase at the end of the year. The central bank is expected to strengthen domestic US dollar liquidity, short the US dollar and increase the cost of going long in the RMB and cool the exchange rate.
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After the news was announced, the offshore RMB weakened for a period of time, which showed that the foreign exchange market was the first to react; However, since the policy’s impact on domestic RMB liquidity is limited, it is not expected to have a substantial impact on mainland equities.
