China hikes forex deposit reserve ratio to 6%

 The People’s Bank of China said on Tuesday it will raise the foreign exchange deposit reserve ratio for local institutions to 6% from 4%, starting November 15. 

The hike is aimed at strengthening foreign exchange liquidity management by local institutions, the PBOC said in a statement. 

The FX deposit reserve ratio determines the amount of dollar reserves local financial institutions are mandated to keep with the PBOC. An increase in the ratio is expected to lower dollar supplies and increase yuan liquidity– a move that is negative for the Chinese currency.

Tuesday’s move indicates some discomfort in Beijing over recent strength in the yuan, which surged to an over four-year high in October. 

A stronger yuan stands to pressure Chinese exports, which are the country’s main economic engine. The yuan rose sharply this year following a string of stronger midpoint fixes from the PBOC.