RMB Exchange Rate Indexes Slip as PBOC's Reserve Requirement Hike Points to More Two-Way Volatility

All three RMB exchange rate indices declined in the week to November 6, data from the China Foreign Exchange Trade System (CFETS) showed. The CFETS RMB index stood at 103.65, down 0.12 week on week; the BIS currency basket index was 111.52, down 0.05; and the SDR currency basket index was 98.56, down 0.29.

Last week, from November 2 to 6, the US dollar index gained 0.31% over the full week to close at 102.2864, while most non-dollar currencies weakened. The euro settled at 1.114 against the dollar, down 0.19% for the week, and the Australian dollar fell 2.36% against the dollar.

After a prolonged strengthening streak, the RMB retreated against the dollar last week. On November 6, the central parity rate was set at 6.7168 per dollar, 22 basis points firmer over the full week, while the offshore RMB traded at 6.6730, down about 0.3% week on week. A stronger dollar and the People's Bank of China's increase in the FX deposit reserve requirement ratio together shaped market expectations.

Several analysts said the policy adjustment should help smooth the pace of RMB appreciation and curb one-way expectations. Export and settlement demand still underpin the currency, but with the dollar's trajectory, domestic and external interest rate differentials and cross-border capital flows all in play, two-way volatility is likely to become more pronounced.

Reserve requirement hike signals a stabilisation intent

The People's Bank of China announced on November 3 that, to strengthen foreign exchange liquidity management at financial institutions, it will raise the FX deposit reserve requirement ratio by 2 percentage points, from 4% to 6%, effective November 15. It is the first adjustment to the ratio since September 2023 and the first increase since December 2021.

The FX deposit reserve requirement is the share of foreign currency deposits that financial institutions must hold with the central bank. Once the ratio is raised, banks must set aside more foreign currency, reducing the FX funds available for use. This in turn adjusts FX market liquidity and influences participants' trading expectations.

Li Liuyang, chief FX analyst at CICC Research, estimated that based on the outstanding FX deposit balance, the increase would freeze roughly US$20 billion to US$24 billion of FX liquidity — relatively limited compared with current settlement volumes, so the signal matters more than the quantity. The policy is mainly intended to stabilise market expectations, smooth short-term exchange rate fluctuations and guard against one-way and procyclical behaviour.

Lian Ping, chairman of the China Chief Economist Forum and dean of the International Institute of Finance, described the move as a macroprudential adjustment to FX liquidity and one-way exchange rate moves at a time when the RMB is relatively strong and FX supply is ample. It aims to steady the pace of appreciation, add two-way flexibility and guide financial institutions, exporters and individuals to treat exchange rate risk rationally.

Seasonal year-end settlement is also an important factor in the timing. Lian noted that November to January is typically the peak settlement period for exporters, as companies need RMB funds for year-end accounting, payroll, tax payments and goods payments. With the policy taking effect in mid-November, it should help ease in advance the appreciation pressure that concentrated settlement could otherwise create.

Export settlement still supportive; watch external demand

Even as the short-term pace of the currency adjusts, institutions remain focused on the FX supply and demand factors supporting the RMB.

Bian Quanshui, chief macro analyst at Western Securities, said the RMB has shown resilience this year despite a stronger dollar, mainly supported by a wider settlement and sales surplus and an improved balance of payments. A goods trade surplus underpins the current account, while an improved cross-border capital flow picture helps ease pressure on FX market supply and demand.

Bian noted that although the RMB's nominal effective exchange rate has appreciated markedly of late, the real effective exchange rate remains near the lower end of its range over the past decade or more. Comparatively low domestic inflation has partly offset the impact of nominal appreciation on export price competitiveness. He argued that China's export competitiveness also rests on structural factors such as manufacturing scale, supply chain completeness and productivity. If domestic inflation continues to run below that of major trading partners, the rise in the real effective exchange rate may remain limited even with some nominal appreciation.

On reserves, data from the State Administration of Foreign Exchange showed China's FX reserves stood at US$3,405.2 billion at the end of October, up US$4.9 billion from the end of September. SAFE said a rising dollar index and mixed moves in major global financial asset prices meant the combined effect of currency translation and asset price changes lifted reserves for the month, while steady economic performance provided support for reserves to remain broadly stable.

Two-way volatility may increase; corporates must focus on risk management

Looking ahead, Wang Qing, chief macro analyst at Oriental Jincheng, expects the RMB's appreciation momentum against the dollar to moderate after the reserve requirement increase, shifting more toward two-way volatility. Still, supported by exports, the currency may remain on the firm side through year-end. Such FX stabilisation measures are mainly aimed at containing the amplitude of exchange rate swings and avoiding short-term overshooting.

Bian Quanshui believes the medium- and long-term supports for the RMB remain in place. A relatively high trade surplus and current account surplus are likely to persist, while growth in net external assets and a decline in external debt burdens provide long-term structural support. Near-term moves, however, will still be shaped by central bank policy, the dollar, domestic and external interest rates and macroeconomic developments.

For corporates, two-way volatility places a greater premium on risk management. Li Liuyang said RMB appreciation may produce exchange losses in the financial statements of companies holding dollar assets, and firms should make proper use of FX derivative instruments to manage currency risk rather than blindly rushing to convert foreign currency.

In practice, companies can schedule settlement and sales around order margins, payment and collection timelines and foreign currency asset-liability positions, managing FX exposure on the basis of genuine business needs and embedding currency risk control into day-to-day operations to reduce the impact of one-sided bets on cash flow and profit.