Summary:
China’s central bank has moved to ease constraints in the FX market, announcing it will cut the foreign-exchange risk reserve ratio for forward FX sales to 0% from 20%, effective March 2.
The decision by the People’s Bank of China (PBOC) removes a macro-prudential tool that had been in place since September 2022, when policymakers raised the ratio to 20% to stem rapid yuan depreciation and capital outflows. By scrapping the requirement, the PBOC effectively lowers the cost for financial institutions to purchase foreign exchange via forward contracts — making it cheaper to buy U.S. dollars and hedge currency exposure.
The move comes against a markedly different backdrop from 2022. The yuan posted its strongest annual gain against the dollar since 2020 last year, breaking back through the psychologically important 7-per-dollar level, with momentum carrying into early 2026. Recent sessions saw both onshore (CNY) and offshore (CNH) yuan touch fresh 33-month highs.
By cutting the FX risk reserve ratio to zero, the PBOC is removing a previous deterrent to forward-based RMB short positioning. Higher ratios raise the cost of selling the yuan via forwards, supporting the currency by increasing hedging friction. Today’s move reduces that friction, and is widely interpreted as an attempt to temper yuan appreciation rather than to stimulate depreciation outright.
The market reaction was swift. Offshore USD/CNH jumped, up around 0.3% on the session, before easing slightly. Traders viewed the change as a signal that authorities are comfortable allowing some retracement after the currency’s strong run. Notably, the PBOC kept the USD/CNY midpoint broadly unchanged from Thursday at 6.9228, with a massive 800+ difference from the model estimate, a record gap.
Analysts said the move serves a dual purpose: improving hedging efficiency and forward-market liquidity, while also acting as a calibrated measure to cool excessive one-way appreciation pressure. By making dollar buying less expensive, policymakers are subtly rebalancing expectations without abandoning their broader commitment to keeping the renminbi “basically stable at a reasonable and balanced level.”
Pan Gongsheng, People’s Bank of China governor, has had enough of you buying so much yuan.
