Economy: The People's Bank of China Tightens Currency Rules to Tame the Yuan

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This first increase since December 2021 uses a tool distinct from key rates. It is expected to tie up about $24 billion more, according to a Reuters calculation.

The mechanism concerns deposits in foreign currencies, subject to a different regime than deposits in yuan. By raising the ratio, the central bank increases the fraction that establishments must keep in reserve rather than use for their operations.

At the end of September, these deposits represented approximately $1.2 trillion. An increase of two points therefore corresponds to some 24 billion additional dollars tied up. This sum does not leave China: it becomes less available in the banking system.

By absorbing part of the liquidity in foreign currencies, Beijing seeks in particular to moderate conversions into yuan and expectations of appreciation. The effect on the exchange rate, however, depends on trade flows, business decisions and international conditions.

The opposite movement had prevailed since 2022. The PBoC had lowered the ratio from 9% to 8% in May 2022, then to 6% in September and to 4% in September 2023. These reductions had made foreign currencies available to banks.

We must also distinguish these bank reserves from official foreign exchange reserves, which reached around $3.4 trillion at the end of September. The decision does not correspond to a sale of this stock by the central bank.

At the same time, China is developing its international payment infrastructure. The International Digital Yuan Center, located in Shanghai, has been operating since September 2025. It includes platforms dedicated to cross-border payments, blockchain services and digital assets.

This project concerns the modalities of circulation and settlement of Chinese currency. The increase in reserve requirements affects the availability of foreign currency in banks. The two policies should therefore not be confused.

The mBridge project is also exploring cross-border settlements in central bank digital currencies. The Bank for International Settlements transferred management to the partners in October 2024. Saudi Arabia, for its part, indicates that it has completed its experiments and concluded its participation in mid-2025.

Machine-translated from French