As the Yuan Rises: China Orders Banks to Increase Foreign Currency Reserves

The People's Bank of China announced an increase in the required reserve ratio on foreign currency deposits from 4% to 6%, effective November 15, 2026, aiming to manage liquidity and curb upward pressure on the yuan against the dollar. Reuters estimates this will drain about $24 billion in available liquidity.

The People's Bank of China announced on Tuesday an increase in the required reserve ratio on foreign currency deposits at financial institutions from 4% to 6%, effective November 15, 2026, a step aimed at managing foreign currency liquidity and reducing pressures from the yuan's rise against the US dollar. The central bank stated, in an announcement carried by Xinhua, that the decision aims to enhance foreign currency liquidity management at financial institutions. According to Reuters, raising the ratio by two percentage points is expected to drain about $24 billion in available foreign currency liquidity from China's financial system, based on calculations by the agency using official deposit data. The amount represents an estimate of the expected impact when the decision is implemented, not liquidity already withdrawn from the market, as the adjustment takes effect mid-month. The decision comes as the yuan continues to gain against the dollar, prompting Chinese monetary authorities to use tools targeting liquidity management and easing the impact of the local currency's appreciation. Marco Sun, chief financial market analyst at MUFG Bank in China, told Reuters that absorbing part of the dollar liquidity available in the banking system aims to curb the momentum of the yuan's rise and prevent the formation of exaggerated expectations of continued one-way movement of the currency.