China’s central bank cut the amount of cash the nation’s lenders must lock away as reserves, stepping up efforts to cushion an economic slowdown amid plunging stock prices and a weakening currency.
The required reserve ratio is to drop by 0.5 percentage points effective March 1, the People’s Bank of China (PBOC) said on its Web site yesterday.
The move adds orthodox easing to its recent efforts to guide market rates lower and injections of liquidity.
The bank has also been trying to restore stability to the nation’s currency as capital flows out at a record pace. Reductions to the required reserve ratio — which allow banks to lend more — help compensate for the departure of capital.
The central bank said it lowered the rate to guide stable and appropriate growth in credit and create appropriate monetary and financial conditions for supply-side structural reform, according to a statement on its official Web site.
The bank’s move came after yuan weakened for a seventh day, the longest run of declines since December last year, as it lowered the currency’s reference rate and the US dollar advanced amid data showing a strengthening US economy.
The bank had reduced its reference rate for the fifth day in a row to 6.5452 per US dollar.
The yuan’s drop suggests that China’s central bank is paying more importance to moves against a basket of currencies, according to Oversea-Chinese Banking Corp (OCBC, 華僑銀行).
A Bloomberg replica of the CFETS RMB Index, which was unveiled in December last year and measures the yuan against 13 exchange rates, shows the Chinese currency has been trading in a range of 101 and 99 in the past eight weeks.
“The key message over the past week is that the authorities are looking at the basket more and keeping the yuan stable to that rather than the [US] dollar,” said Tommy Xie, a Singapore-based economist at OCBC.
The yuan fell 0.09 percent to 6.5472 per US dollar in Shanghai as of 5:10pm yesterday, taking its seven-day decline to 0.5 percent, according to China Foreign Exchange Trade System prices.
The offshore currency traded in Hong Kong dropped 0.02 percent to 6.5478. Both rates posted their first monthly gains since October last year.
A measure of US dollar strength rose 0.7 percent on Friday, the most since Dec. 17 last year, as data showed the US economy expanded more than estimated in the fourth quarter.
The central bank has been trying to restore stability to the yuan this year after capital outflows quickened following a surprise devaluation of the currency in August last year.
The nation has been burning through foreign reserves to defend the yuan, depleting the stockpile by US$513 billion last year in the first annual decline in more than two decades.
The figure includes a US$100 billion drop in the valuation of the holdings, according to a statement distributed to reporters before a central bank briefing on Friday.
There is no basis for continued depreciation of the yuan, because China’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against the basket of currencies, PBOC Governor Zhou Xiaochuan (周小川) said in an interview with Caixin magazine earlier this month.
On Friday, he said that the US dollar still plays the most important role in the basket of currencies against which the central bank pegs the yuan.
In money markets, the central bank yesterday auctioned 230 billion yuan (US$35 billion) of seven-day reverse-repurchase agreements, leaving a net injection of 150 billion yuan. The interest rate was kept unchanged at 2.25 percent.
The one-day repurchase rate, a gauge of interbank funding availability, climbed five basis points to 1.98 percent in Shanghai, according to a weighted average from the National Interbank Funding Center.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose one basis point to 2.31 percent, data compiled by Bloomberg show.
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