On Monday, the People’s Bank of China will raise the foreign exchange risk reserve ratio for financial institutions when buying currency forwards from 0% to 20%, Caixin reports, in a move aimed at slowing the yuan’s continued slide.
In a public statement, the central bank sad that the measure aims to “prevent macro financial risks and help financial institutions operate in a healthy and stable manner,” after economic threats such as US-China trade tensions had made foreign exchange markets “volatile”.
Under the new policy, financial institutions must deposit 20% of the value of their yuan forwards from the previous month in a holding account with the People’s Bank for one year. A currency forward is a security that buys or sells a currency at a specific price on a future date to enable hedging against price swings.
The policy was first used in October 2015 after the yuan plummeted following a decision by the central bank to change how the currency’s daily parity rate was established, but was withdrawn in September of last year when the yuan stabilised.
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