The central bank takes action to signal stability in the exchange rate; the RMB will continue to fluctuate within a two-way range

The People’s Bank of China announced on February 27 that starting from March 2, 2026, the foreign exchange risk reserve requirement ratio for forward foreign exchange sales will be reduced from 20% to 0%.

This is the central bank’s first use of this tool in nearly three and a half years. In September 2022, faced with the continuous decline of the RMB against the US dollar, the People’s Bank of China had increased the foreign exchange risk reserve ratio for forward sales from 0 to 20%.

Market analysts believe that this move aims to reduce corporate forward foreign exchange purchase costs, support real economy currency risk management, and signal countercyclical adjustment. It also seeks to ease the recent rapid appreciation of the RMB, stabilize foreign exchange market expectations, and keep the RMB exchange rate generally stable at a reasonable and balanced level.

Following the policy announcement, offshore RMB against the US dollar briefly plummeted over 100 basis points, turning from gains to losses and breaking below 6.85.

Wang Qing, Chief Macro Analyst at Orient Securities, believes that if the RMB continues to appreciate rapidly, other stabilizing policies may be implemented, and the central parity rate adjustment efforts could be intensified.

Pang Ming, a senior researcher at the National Finance and Development Laboratory, emphasized that the RMB exchange rate is likely to continue fluctuating bidirectionally with a mild appreciation trend, but a strong upward trend still requires cautious judgment.

Lowering Corporate Forward Purchase Costs

The foreign exchange risk reserve requirement ratio for forward sales is a countercyclical macroprudential management tool created by the People’s Bank of China for banks’ forward foreign exchange sales. It was first incorporated into policy after the August 11, 2015, exchange rate reform. This tool requires financial institutions to deposit interest-free reserves proportional to their contracted amount, which influences forward sales prices and thereby regulates market trading behavior.

Wang Qing believes that lowering the reserve ratio for banks’ forward sales will directly reduce their costs for handling such transactions, thereby lowering corporate forward purchase costs. This encourages companies to engage in forward foreign exchange purchases, effectively reducing their currency risk management costs.

For example, when the reserve ratio is 20%, a bank needs to freeze $20 without interest for every $100 of forward sales, and this cost is ultimately passed on to the company, increasing its forward purchase price.

“In practice, some banks may pass this implicit cost to companies by adjusting forward quotes or widening spreads, leading to higher costs for companies locking in forward rates. Some small and medium-sized enterprises may then forgo hedging and be exposed directly to exchange rate risks,” said Liu Tao, Senior Researcher at Guangkai Research Institute.

Now, with the reserve ratio reduced from 20% to 0, banks no longer need to freeze funds, and the cost of forward foreign exchange purchases will decrease accordingly.

Cooling the RMB Appreciation

More importantly, the central bank’s reduction of the reserve ratio from 20% to 0 signals a policy to prevent the RMB from appreciating too quickly, helping to stabilize market expectations.

Besides enabling companies to lock in exchange rates at lower costs and better manage currency risks to serve real economic needs, Minsheng Bank Chief Economist Wen Bin stated that the adjustment also considers several factors: first, lowering companies’ forward purchase costs increases demand for USD in the foreign exchange market, which can moderate the rapid appreciation of the RMB and stabilize exchange rate expectations; second, given that there is currently no pressure for currency depreciation, the countercyclical tools are being phased out to return policies to neutrality and reduce direct market intervention.

Following the holiday, the RMB appreciated rapidly against the dollar, with onshore and offshore rates returning to levels seen three years ago. On February 25-26, the RMB accelerated upward, with onshore and offshore RMB breaking through 6.87 and 6.84 respectively. On February 26, offshore RMB reached a high of 6.82665, the highest since April 2023.

Since the beginning of the year, both onshore and offshore RMB against the dollar have appreciated by about 2%, maintaining a strong trend after breaking the 7.0 mark at the end of 2025.

Wen Bin noted that amid the rapid appreciation and some pro-cyclical behavior in the foreign exchange market, the central bank has begun to take measures to balance supply and demand and support real enterprises in managing exchange rate risks.

For the foreign exchange market, the direct impact of lowering the reserve ratio for forward sales on demand for foreign exchange may be limited, but it sends a clear policy signal.

“This is a gentle ‘cooling’ signal to market bets on RMB appreciation, indicating that the central bank’s goal remains to keep the RMB exchange rate basically stable at a reasonable and balanced level,” Wen Bin said.

Wang Qing analyzed that in response to the recent rapid RMB appreciation, the regulatory authorities’ stabilizing tools have already been deployed, likely easing the RMB’s fast appreciation trend after the holiday.

Liu Tao believes that with the RMB strengthening and market expectations remaining stable, lowering the reserve ratio shifts from emergency intervention to routine management—no longer artificially raising the cost of foreign exchange purchases to prevent depreciation, but allowing market mechanisms to play a fuller role, guiding rational views on exchange rate fluctuations, reducing pro-cyclical herd behavior, and maintaining the RMB exchange rate at a reasonable and balanced level.

Continuing Two-Way Fluctuations

The reduction of the reserve ratio for forward foreign exchange sales is a concrete measure to implement earlier policies aimed at stabilizing foreign trade and improving services.

On January 15, at a State Council Information Office press conference, the central bank announced a package of policies encouraging financial institutions to enhance foreign exchange risk hedging services.

By 2025, the proportion of enterprises engaging in hedging is expected to rise to 30%, and the use of RMB for trade settlement will also increase to nearly 30%. This means about 60% of export-oriented companies are less affected by exchange rate risks.

Market analysts believe these ratios could further increase, helping to maintain exchange rate stability.

It is worth noting that the current complex international environment, with increasing geopolitical conflicts, may intensify global foreign exchange volatility and impact the RMB exchange rate.

Therefore, many market experts warn that as the market plays a larger role in exchange rate formation, the RMB may experience both appreciation and depreciation, with two-way fluctuations.

Wen Bin stated that given the complex external situation, the RMB’s future trend is highly uncertain. Companies and financial institutions should avoid blindly following or speculating on exchange rate movements, and instead adhere to a neutral stance on exchange rate risk and strengthen risk management.

Wang Qing predicts that if the RMB continues to appreciate rapidly, additional stabilizing measures—such as raising the macro prudential adjustment coefficient for outbound loans of domestic enterprises, lowering cross-border financing parameters for companies and financial institutions, or increasing foreign exchange reserve requirements—may be implemented, and the central parity rate adjustment efforts could be intensified. Historical experience shows these tools can effectively guide market expectations and prevent excessive exchange rate overshoot.

“It should be emphasized that the main goal of stabilizing policies is to control the fluctuation range of the RMB exchange rate, not to change its direction,” Wang Qing stressed.

Pang Ming analyzed that RMB appreciation results from a combination of weakening external US dollar strength, improving domestic fundamentals, stable policy expectations, and asset revaluation. The core variables influencing the RMB exchange rate remain the US-China interest rate differential, the pace of domestic economic recovery, and global risk appetite. As major economies’ monetary policies gradually ease, the US dollar index may remain volatile and weak, providing external support for the RMB. Domestically, with continued policy efforts, improved domestic demand, and stabilized capital markets, RMB assets will become more attractive, attracting cross-border capital inflows. Meanwhile, geopolitical and global trade uncertainties may cause temporary disturbances.

(Source: Yicai)