Constant dollars

China tries to calm yuan rally by increasing reserve requirements

China forced banks to hold more foreign currency in reserve for the first time in more than a decade, its most important move yet to curb the yuan surge.

The country’s financial institutions will have to hold 7% of their currencies in reserve from June 15, according to a central bank statement on Monday. This is a 2 percentage point increase and the first such increase since 2007. The move, which the People’s Bank of China says will help liquidity management, effectively reduces the supply of dollars and other currencies on the ground, putting pressure on the yuan to weaken.

Although analysts said the direct impact could be small, the move is the PBOC’s clearest signal that it is unhappy with the yuan’s surge to a three-year high against the greenback. Authorities had so far limited their response to rhetoric: A former central bank official and state media commentator criticized the currency over the weekend.

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