Investing.com-- The People’s Bank of China said on Friday that it will cut the amount of foreign exchange that is required to be held by banks, as it moves to stem further weakness in the yuan and support a slowing economic recovery.
The PBOC said it will cut the foreign exchange reserve requirement ratio (RRR) by 200 basis points to 4% from 6%, starting from September 15, according to a statement on the bank’s website.
The move will free up a substantial amount of foreign exchange reserves in the country, particularly dollars, which is expected to help support the yuan. The Chinese currency rose as much as 0.5% after the move, before settling to trade flat.
The move is expected to make holding dollars cheaper for Chinese banks, and is also expected to provide the PBOC with more headroom to cut interest rates and support the economy.
But while the RRR cut is expected to offer some near-term support to the yuan, the Chinese currency still faces sustained pressure from worsening sentiment towards the Asian economy, as well as a widening gulf between local and U.S. interest rates.
The yuan is one of the worst performing Asian currencies this year, down around 5% following a string of weak economic readings from China.
While the PBOC has attempted to stem further losses in the yuan with strong daily midpoints and currency market intervention, the outlook for the currency is skewed to the downside, especially if local monetary policy loosens further to support growth.
Chinese banks have already begun trimming their yuan deposit rates under guidance from the PBOC, which is expected to ramp up local liquidity and present a weaker yuan in the coming months.
Traders have also largely soured on the yuan amid uncertainty over the Chinese economy, as well as a weak outlook for local interest rates.