USD/CNH recovers above 6.8500 as PBOC cuts FX risk reserve ratio to 0%

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The USD/CNH pair recovers some lost ground to near 6.8505 during the early European session on Friday. The Chinese Yuan (CNH) weakens against the US Dollar (USD) as China moves to rein in the currency’s strength by scrapping an extra fee for betting against it in the derivatives market.

USD/CNH rebounds to around 6.8505 in Friday’s early European session.
PBOC cut the FX risk reserve ratio to 0% from 20%.
The US PPI inflation report for January will be closely watched later on Friday.

The People's Bank of China (PBOC) announced on Friday that it will cut the foreign exchange risk reserve ratio from 20% to 0% on foreign-currency forward contracts, starting March 2. The Chinese central bank said in the statement that this move will “support companies’ management of foreign-exchange risks.”

The PBOC also said that it will keep the Chinese Yuan exchange rate stable at reasonable, equilibrium levels and guide financial institutions to improve FX hedging services. The CNH edges higher against the Greenback following the announcement.

The Bureau of Labor Statistics (BLS) will publish the US Producer Price Index (PPI) report for January later on Friday. Economists expect a moderate cooling of wholesale inflation. The headline PPI is expected to show an increase of 2.6% in January, while the core PPI is estimated to show a rise of 3.0% during the same period. Any signs of hotter inflation in the US could delay the US Federal Reserve (Fed) interest rate cuts and boost the USD in the near term.

(This story was corrected on February 27 at 05:00 GMT to say, in the title, that USD/CNH recovers above 6.8500 as PBOC cuts FX risk reserve ratio to 0%, not 0.8500)

PBOC FAQs

What does the People's Bank of China do?

The primary monetary policy objectives of the People's Bank of China (PBoC) are to safeguard price stability, including exchange rate stability, and promote economic growth. China’s central bank also aims to implement financial reforms, such as opening and developing the financial market.

Who owns the PBoC?

The PBoC is owned by the state of the People's Republic of China (PRC), so it is not considered an autonomous institution. The Chinese Communist Party (CCP) Committee Secretary, nominated by the Chairman of the State Council, has a key influence on the PBoC’s management and direction, not the governor. However, Mr. Pan Gongsheng currently holds both of these posts.

What are the main policy tools used by the PBoC?

Unlike the Western economies, the PBoC uses a broader set of monetary policy instruments to achieve its objectives. The primary tools include a seven-day Reverse Repo Rate (RRR), Medium-term Lending Facility (MLF), foreign exchange interventions and Reserve Requirement Ratio (RRR). However, The Loan Prime Rate (LPR) is China’s benchmark interest rate. Changes to the LPR directly influence the rates that need to be paid in the market for loans and mortgages and the interest paid on savings. By changing the LPR, China’s central bank can also influence the exchange rates of the Chinese Renminbi.

Are private banks allowed in China?

Yes, China has 19 private banks – a small fraction of the financial system. The largest private banks are digital lenders WeBank and MYbank, which are backed by tech giants Tencent and Ant Group, per The Straits Times. In 2014, China allowed domestic lenders fully capitalized by private funds to operate in the state-dominated financial sector.

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