Chinese yuan weakens after PBOC raises foreign-exchange reserve requirement to 6%

The Chinese yuan weakened against the US dollar on Tuesday after the PBOC raised the foreign-exchange reserve requirement for financial institutions to 6% from 4%, with the change taking effect on November 15. Reuters reported that the currency was on track for a 0.33% one-day fall if losses held through the session, which would be its steepest daily decline since May 15.

PBOC raises the reserve requirement to 6% from 4%

The PBOC said the foreign-exchange reserve requirement for financial institutions would rise by 2 percentage points to 6% from 4%, effective November 15. Before markets opened on Tuesday, the central bank set the yuan midpoint at 6.7150 per dollar. Reuters said the midpoint was 661 pips weaker than its estimate, marking the largest deviation on the weaker side since September 10.

Yuan was on track for a 0.33% daily fall

Reuters reported that the yuan was on track to fall 0.33% against the dollar if losses remained through Tuesday's trading session. The reported fall would be the yuan's steepest single-day decline since May 15.

The offshore yuan traded at 6.6677 per dollar, down around 0.29% during Asian trading hours, Reuters reported.

Exporters' year-end conversions usually support the yuan

Chinese exporters generally convert a larger proportion of their foreign-currency earnings into yuan towards the end of the year and before the Lunar New Year, Reuters reported.

Reuters said these conversions are linked to accounting and administrative requirements, employee bonuses and holiday-related expenses. The agency said the conversions typically increase demand for the yuan in December and January.

Yuan had gained 0.74% against the dollar in October

The yuan gained 0.74% against the dollar in October and had appreciated by around 5% against it during the year before Tuesday's move, Reuters reported. The gains were supported by exports, trade surpluses and corporate demand for yuan conversion.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the PBOC's move reflected concerns about the yuan's rapid strengthening in October. Zhang said China may tolerate moderate currency appreciation but could be uncomfortable with a faster pace of gains because of its dependence on exports.