China's offshore yuan weakens after reserve requirement ratio cut

China's offshore yuan weakened on Thursday after the People's Bank of China said it would cut banks' reserve requirement ratio - the amount of cash that banks must hold as reserves - by 25 basis points.

The yuan recovered a touch, but still is close to its one-year low of 7.3678 per dollar hit last week. Image Source: Reuters

China's offshore yuan weakened on Thursday after the People's Bank of China said it would cut banks' reserve requirement ratio - the amount of cash that banks must hold as reserves - by 25 basis points.

The dollar rose to as high as 7.2921 against the yuan traded offshore right after the announcement, up 0.3 per cent on the day .

The RRR cut was China's second this year and aims to help keep liquidity ample and support a nascent economic recovery, but could exacerbate the decline in the already under-pressure yuan, as domestic rates fall further.

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The yuan recovered a touch, but still is close to its one-year low of 7.3678 per dollar hit last week.

China's yuan has depreciated steadily since February as the faltering post-pandemic economy and widening yield gap with other economies, particularly the United States, affected capital flows and trade.

Both the onshore and offshore units of the Chinese currency have lost roughly 5 per cent against the dollar so far this year to become one of the worst performing Asian currencies.

Its rapid decline has prompted authorities to roll out a slew of measures to contain the weakness.

State banks are using FX swaps to raise the cost of shorting the currency, as they have done in previous episodes of currency weakness, and have also sold dollars every other day to shore up the yuan in both offshore and onshore markets.

The yuan has also lost a major source of support as foreign portfolio investors leave Chinese markets. The more stable direct investment flows into China have also shrivelled, with net inflows at their lowest since records began 25 years ago.

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