China Scraps Forex Risk Reserves to Ease Dollar Buying

The People's Bank of China announced the removal of foreign exchange risk reserves for some forward contracts, reducing costs for purchasing the dollar. This decision reverses a 2022 policy and comes as the yuan strengthens against the dollar, showing signs of continued upward momentum in the new year.

In a significant policy shift, China's central bank announced on Friday that it will eliminate the foreign exchange risk reserves for certain forwards contracts. This decision aims to lower the costs associated with buying dollars.

The People's Bank of China (PBOC) specified that the foreign exchange risk reserves required for financial institutions purchasing foreign currency through forwards will be reduced from 20% to zero, effective March 2.

This move reverses the PBOC's September 2022 policy, initially introduced to counter the yuan's sharp depreciation and capital outflows. Following its biggest annual gain against the dollar since 2020, the yuan has maintained its strength above the 7-per-dollar mark in 2023.