China's central bank to cut forex reserve requirement ratio by 2 percentage points

Photo taken on Oct. 19, 2020 shows an exterior view of the People's Bank of China in Beijing, capital of China. (Xinhua/Peng Ziyang)

China's central bank on Monday said that it will cut the foreign exchange reserve requirement ratio for financial institutions by 2 percentage points from Sept. 15.

The reserve requirement ratio will be reduced from its current 8 percent to 6 percent, the People's Bank of China said in a short notice on its website.

The move aims to improve "financial institutions' ability to use foreign exchange capital," according to the notice.

"The cut will help increase the liquidity of the U.S. dollar in the market and contribute to the stability of the renminbi exchange rate," said Wen Bin, chief economist at China Minsheng Bank.

Due to the accelerated tightening of monetary policy by the U.S. Federal Reserve, the U.S. dollar index once broke the 110 mark, which triggered the passive depreciation of the renminbi against the U.S. dollar.

"The central bank's move sends a positive signal to the market, which is conducive to stabilizing renminbi exchange rate expectations and avoiding irrational overshooting," Wen said.

The central bank last cut the forex reserve requirement ratio in May, slashing it by 1 percentage point.