Less than a week after the US Treasury issued a report criticizing China's lack of transparency on the yuan (and its interventions), Beijing has 'intervened' more directly in a move forcing banks to hold more foreign currencies in reserve.
Financial institutions will need to hold 9% of their foreign exchange in reserve from Dec. 15, the central bank said in a statement Thursday evening Beijing time, a 2 percentage point increase.
Bloomberg reports that earlier in the day, the People’s Bank of China had signaled a limit to its tolerance for the recent advances by setting its reference rate at a weaker-than-expected level.
The move, which the PBOC said will help liquidity management, effectively reduces the supply of dollars and other currencies onshore. This implicitly puts pressure on the yuan to weaken and that is what it has done overnight...
The increase is the second rise this year, after the central bank hiked the ratio by 2 percentage points in June, the first increase since 2007.
Interestingly, the FX RRR hike comes at a level that twice in the last 10 years has been associated with a significant regime shift in the yuan (devaluations).
How would US equity markets cope with a suddenly surging USD and the implicit increase in volatility that has been associated with past interventions at these levels by Beijing?
It may not be an issue, as Goldman Sachs notes, while today's announcement could temporarily slow CNY appreciation, appreciation pressures remain as Chinese corporates still have "unexplained USD holdings" on hand, goods trade surplus might stay high, and structurally we could see continued inflows to RMB assets from global investors.