6%: China’s Central Bank Raises FX Reserve Requirement Ratio to Cool the Yuan’s Rapid Appreciation

The reserve requirement will rise by 2 percentage points. Announcing the measure on the morning of 3 November, the People’s Bank of China (PBOC) said financial institutions’ foreign exchange deposit reserve requirement ratio would increase from the current 4% to 6%, effective 15 November 2026, to strengthen their foreign exchange liquidity management. USD/CNH responded with a jump of around 200 pips to a high of 6.6664. That translated into an approximately 0.3% decline for the offshore yuan, its first fall in nearly three weeks. Following the onshore market’s opening, the yuan also depreciated through 6.65 and then 6.66 against the dollar.

A prolonged advance in the offshore yuan preceded the decision. On 2 November, a move through 6.65 against the dollar took it to an intraday high of 6.6425; the spot exchange rate ended daytime trading at 6.6458. The yuan’s spot appreciation against the dollar since the beginning of the year had reached approximately 4.91%, while offshore gains exceeded 4.5%. The currency was at its strongest since June 2022 after four consecutive months of appreciation. Using the foreign exchange deposit reserve requirement ratio now is intended to slow that advance, not send it into reverse.

4% to 6%: The Mechanics of Foreign Exchange Deposit Reserves

When financial institutions accept foreign currency deposits, they must place a portion with the central bank. The foreign exchange deposit reserve requirement ratio specifies how large that portion must be. US dollars make up the overwhelming majority of these deposits.

Increasing the ratio draws more dollars into central bank reserves and leaves banks with fewer to lend, invest or sell domestically. The mechanism is simple: reduced domestic dollar supply lifts the dollar’s price against the yuan. This provides marginal relief from pressure for the yuan to strengthen.

Approximately $24 billion in extra reserves will have to be placed with the central bank from 15 November as the ratio rises from 4% to 6%. That calculation reflects outstanding foreign currency deposits of approximately $1.2 trillion at the end of September 2026. The additional requirement is relatively small against two measures of market activity: China’s average daily foreign exchange trading volume exceeds $800 billion, and banks processed $294.2 billion in foreign exchange settlements in September alone.

The distinction matters for interpreting the policy. By reducing domestic dollar liquidity, the central bank seeks to curb the speed of yuan appreciation without overturning its upward trend. The change is “relatively moderate.” Its underlying policy message merits more scrutiny than the amount of funding withdrawn.

6.65: Yuan Appreciation Pace Draws Policy Attention

Exchange rate signals have appeared repeatedly in the central bank’s communications since October. Publication of “The People’s Bank of China’s Policy Position on the RMB Exchange Rate” on its official website on 8 October came first. Governor Pan Gongsheng then detailed the exchange rate policy framework at the Annual Conference of Financial Street Forum on 19 October. His emphasis was that “under certain circumstances, the PBOC uses macroprudential management tools, and in extreme circumstances may even intervene directly in the foreign exchange market, to correct market ‘herding behaviour’ and the self-reinforcement of irrational expectations.” The reserve requirement increase fits within this framework as a macroprudential management measure, rather than “direct intervention.”

The daily central parity rate had already offered a signal. For Monday, 2 November, the central bank set the USD/CNY midpoint at around 6.71. A Reuters model-based survey had projected approximately 6.66, so the official fixing implied a substantially weaker yuan. That dollar-favouring midpoint indicated that the central bank did not want excessive yuan strength. Increasing the foreign exchange deposit reserve requirement ratio carries the same message through a quantitative policy instrument.

The historical record is one of “two-way adjustment”. In 2021, sustained yuan appreciation prompted two increases in the foreign exchange deposit reserve requirement ratio, lifting it to 9%. Yuan depreciation in 2022 and 2023 prompted the opposite response. Cumulative reductions of 5 percentage points lowered the ratio to 4%, easing dollar shortages and stabilising the exchange rate. The objective is to dampen procyclical fluctuations, not set a particular level for the currency.

Market forces, not policy intervention, account for this phase of yuan appreciation in the view of some analysts. Analysis of multiple datasets indicates little correlation between the appreciation and the narrative of “foreign investors increasing their holdings of Chinese assets.” A more direct driver has been banks’ persistent surpluses in spot and forward foreign exchange settlements and sales since March 2025.

A quantitative instrument that ties up $24 billion can affect the speed of appreciation, rather than its direction, if market supply and demand are the principal drivers instead of policy guidance. The central bank’s decision to act now conveys acceptance of continued appreciation, but not at the current rate. For foreign exchange traders, Beijing’s practical message is a preference for a “slower, steadier” yuan advance over sustained rapid strengthening.

Four consecutive months of appreciation and a break through 6.65 against the dollar have left policymakers less willing to tolerate the pace of gains. With foreign exchange settlement and sales surpluses supporting appreciation, immobilising $24 billion cannot reverse the trend. The change lies in market awareness: the area around 6.65 is now known to be attracting policymakers’ attention. The authorities have not rejected appreciation itself. From today onwards, however, the market will no longer determine its speed on its own.