HONG KONG, Feb 27 (Reuters) – China’s yuan is surging against the U.S. dollar, boosted by booming exports and aided by falling U.S. interest rates and the wobbly greenback.
The yuan strengthened 4.4% last year in its biggest annual gain since 2020, and has firmed about 2% so far in 2026, hovering near three-year highs.
China’s central bank moved to slow the pace of yuan appreciation on Friday, scrapping risk reserves requirements for forex forward contracts in a move that would encourage dollar buying.
The People’s Bank of China (PBOC) may deploy additional measures to prevent the yuan from appreciating too quickly, analysts say.
Here are the tools at its disposal:
** FX REQUIREMENTS RATIO
The PBOC said on Friday it would scrap the 20% reserves requirements for forex forward contracts, starting on March 2.
The move would reduce the cost of dollar buying, and reverses a decision in September 2022 to raise the risk reserve requirements to stem the yuan’s rapid losses and capital outflows.
“It sends a clear policy signal that regulators want to prevent excessive yuan appreciation, which will help stabilize market expectations,” said Wang Qing, chief macroeconomic analyst at Orient Golden Credit Rating.
Next, the PBOC could raise outright the amount of foreign exchange that financial institutions must hold as reserves, which would require dollar buying and tighten onshore dollar liquidity – slowing yuan gains. It is currently at 4%, having been reduced from 6% in 2023 as a measure to try and stem yuan weakness.
** COUNTER-CYCLICAL FACTOR IN YUAN’S DAILY GUIDANCE FIX
Since December, the central bank has been setting its daily yuan official guidance at levels weaker than market projections, signaling its attention to slow the pace of yuan appreciation.
The gap has widened this week to record levels, signifying the PBOC’s growing discomfort with the yuan’s rise and its strong intent to manage market expectations.
** STATE BANK DOLLAR BUYING
China’s major state-owned banks bought dollars in the onshore spot market and held them in an unusually strong effort to rein in yuan strength, Reuters reported in December.
The lenders did not appear to recycle the dollars into the swap market, likely aimed at tightening dollar liquidity and so raising the cost of long yuan bets.
Although the PBOC itself wasn’t seen directly in the market, the state banks could have been acting on behalf of the central bank, said Brad Setser, a currency expert at the Council on Foreign Relations, in a recent blog post.
“All the activity is with the state banks,” he noted estimating a “nearly unprecedented” level of backdoor intervention in December.
** VERBAL GUIDANCE
PBOC officials frequently make public statements to reaffirm its commitment to keep the yuan “basically stable”, and warn against the risk of currency overshooting.
The central bank has also repeatedly urged market participants to use derivatives to hedge against currency risks, rather than making one-way bets on the yuan.
** DIRECT INTERVENTION
In extreme cases, the PBOC can directly buy and sell foreign currencies in the market to influence exchange rates.
During the 2015-16 China market crash, the PBOC sold dollars in the market to stablize a slumping yuan.
In recent years, China’s central bank has refrained from direct intervention, which is evidenced by its relatively stable foreign currency reserves.
(Reporting by Jiaxing Li in Hong Kong; Editing by Kim Coghill)
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