FX Reserve Requirement Ratio Lifted to 6% by China’s Central Bank to Restrain Rapid Yuan Appreciation

A 2 percentage point increase will take financial institutions’ foreign exchange deposit reserve requirement ratio from the current 4% to 6% on 15 November 2026, under a measure announced by the People’s Bank of China (PBOC) on the morning of 3 November. The central bank said the change was intended to strengthen foreign exchange liquidity management at financial institutions. In response, USD/CNH climbed around 200 pips, reaching a high of 6.6664. The offshore yuan consequently fell approximately 0.3%, its first decline in nearly three weeks. After the onshore market opened, the yuan weakened beyond 6.65 and subsequently 6.66 against the dollar.

The announcement came against a backdrop of prolonged offshore yuan gains. Trading on 2 November had taken the currency through 6.65 to an intraday high of 6.6425 against the dollar; the spot exchange rate finished the daytime session at 6.6458. Year-to-date appreciation in the yuan’s spot exchange rate against the dollar stood at approximately 4.91%, compared with a gain of more than 4.5% for the offshore yuan. Four successive months of strengthening had brought the currency to its highest level since June 2022. In choosing this moment to adjust the foreign exchange deposit reserve requirement ratio, the central bank seeks to slow the appreciation without reversing it.

Foreign Exchange Deposit Reserve Requirements Restrict Available Dollar Liquidity

Of the foreign currency deposits received by financial institutions, a proportion must be held at the central bank. The foreign exchange deposit reserve requirement ratio sets that proportion. These deposits are overwhelmingly denominated in US dollars.

An increase in the ratio works by requiring banks to lodge additional dollars with the central bank. That leaves less dollar funding for domestic loans, investment or sale. With fewer dollars circulating in the domestic market, their price rises relative to the yuan, providing a modest easing of appreciation pressure on the Chinese currency.

Against approximately $1.2 trillion in outstanding foreign currency deposits at the end of September 2026, the move from 4% to 6% will require approximately $24 billion of extra reserves to be lodged with the central bank from 15 November. For comparison, average daily foreign exchange turnover in China exceeds $800 billion, while banks handled $294.2 billion in foreign exchange settlements in September alone. Relative to those flows, the additional reserve requirement is modest.

The distinction is therefore between restraining appreciation and reversing it: withdrawing domestic dollar liquidity is intended to achieve the former, not the latter. As an adjustment, it is “relatively moderate.” Its significance lies more in the message policymakers are sending than in the amount of funding withdrawn.

Central Bank Reinforces Its Signal to Slow Yuan Appreciation

Repeated statements since October have made the central bank’s exchange rate stance clear. Its publication of “The People’s Bank of China’s Policy Position on the RMB Exchange Rate” on the official website on 8 October was followed by Governor Pan Gongsheng’s presentation of the exchange rate policy framework at the Annual Conference of Financial Street Forum on 19 October. He stressed that “under certain circumstances, the PBOC uses macroprudential management tools, and in extreme circumstances may even intervene directly in the foreign exchange market, to correct market ‘herding behaviour’ and the self-reinforcement of irrational expectations.” Within that framework, the higher foreign exchange deposit reserve requirement ratio represents the deployment of a macroprudential management tool, not “direct intervention.”

The daily central parity rate provides a further indication of that stance. Around 6.71 was the USD/CNY midpoint set by the central bank on Monday, 2 November, against approximately 6.66 projected in a Reuters model-based survey. The fixing thus implied a substantially weaker yuan, favouring the dollar and signalling that excessive yuan strength was unwelcome. A quantitative policy tool, the higher foreign exchange deposit reserve requirement ratio, now gives further expression to that signal.

Past use of the instrument demonstrates its consistent role in “two-way adjustment”. Two increases during the yuan’s sustained rise in 2021 took the foreign exchange deposit reserve requirement ratio to 9%. The response to yuan weakness in 2022 and 2023 went the other way: cumulative cuts of 5 percentage points brought the ratio down to 4%, relieving dollar shortages and stabilising the exchange rate. Smoothing procyclical fluctuations, rather than fixing the exchange rate at a specified level, is the purpose of the tool.

For some analysts, market forces explain the latest yuan appreciation more than policy intervention does. Evidence drawn from multiple datasets points to little correlation between the gains and the narrative of “foreign investors increasing their holdings of Chinese assets.” More directly influential have been the continuing surpluses in banks’ spot and forward foreign exchange settlements and sales recorded since March 2025.

Where appreciation chiefly reflects market supply and demand, rather than policy guidance, immobilising $24 billion through a quantitative instrument can affect how quickly the currency rises, rather than where it is heading. The timing communicates the central bank’s acceptance of further appreciation, but not at the current speed. Foreign exchange traders can read the practical message as a preference in Beijing for a “slower, steadier” strengthening of the yuan instead of a continuation of rapid gains.

Policymakers are showing less tolerance for the speed of appreciation following four consecutive months of gains and the yuan’s advance beyond 6.65 against the dollar. An additional $24 billion held in reserves cannot reverse a rising trend sustained by foreign exchange settlement and sales surpluses. It does, however, leave the market aware that the area around 6.65 has attracted policymakers’ attention. Further appreciation has not been ruled out; from today onwards, however, the market alone will no longer dictate its pace.