(Yicai) March 2 -- China’s central bank is sending a clear signal that it intends to prevent a rapid  and excessive appreciation of the nation’s currency by removing the risk reserve requirement on forward foreign exchange sales, according to analysts.

The People’s Bank of China announced the move to lower the requirement to zero from 20 percent, effective today, at the end of last week. The central bank had raised it to 20 percent from zero in September 2022 amid prolonged pressure on the Chinese yuan from the US dollar.

Analysts said the move should reduce the cost for companies buying forward forex contracts, support exchange rate risk management for the real economy, while signalling a counter-cyclical adjustment, thereby stabilizing foreign exchange market expectations and helping to keep the yuan at a reasonable and balanced level.

The offshore yuan has continued to appreciate versus the dollar since breaking above 7 at the end of last year, gaining about 2 percent so far this year. But after the PBOC’s Feb. 27 announcement on the reserve requirement for forward forex sales, which mandates the percentage that financial institutions conducting forward forex sales for clients must deposit based on the amount of those forward contracts, the exchange rate briefly plunged more than 1 percent to below 6.85.

The PBOC has two main goals, said Wen Bin, chief economist at China Minsheng Bank. First, it aims to lower corporate forex hedging costs and increase dollar demand in the foreign exchange market, which should help slow the redback’s rapid appreciation and steady market expectations. Second, in the absence of depreciation pressure on the currency, the central bank is withdrawing this tool to bring policy back to a neutral stance and limit direct intervention in the market.

The move should encourage more businesses to use forward forex contracts and materially reduce the cost of exchange rate risk management, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

The complex and volatile international landscape, together with rising geopolitical tensions, could heighten global forex market volatility and bring uncertainty to the yuan’s trajectory.

The currency is expected to continue two-way swings, with moderate strengthening, said Pang Ming, senior researcher at the National Institution for Finance and Development, warning that any judgment that the yuan will appreciate strongly should be made carefully.

Editor: Futura Costaglione