Falling yuan funds from forex make room for RRR adjustment

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The latest data from the People's Bank of China (PBOC), China's central bank, showed that its yuan funds outstanding for foreign exchanges had dropped 89.3 billion yuan (about 14 billion U.S. dollars) as of the end of October compared to one month earlier, marking the first decrease in eight years.

According to the PBOC's balance data, the central bank's yuan funds outstanding for foreign exchanges stood at 23.3 trillion yuan by the end of October.

"Such a drop is caused by a decrease in foreign exchange receipts and settlements from individuals and companies," said Zhao Qingming, a finance expert with China Construction Bank.

Zhao denied that the drop was caused by the outflow of speculative capital or foreign capital from the country. The declining foreign exchange receipts and settlements, however, are due to market expectations of the yuan depreciating.

The central bank announced last month that yuan funds nationwide stemming from foreign exchanges decreased 24.9 billion yuan in October from September, indicating that other financial institutions, including commercial banks and credit cooperatives, had seen a net increase of yuan funds totalling 64.4 billion yuan.

Analysts say that commercialized financial institutions are inclined to hold onto greenbacks amid the yuan's weakening against the U.S. dollar recently, thus resulting in a rise in foreign currency holdings in these institutions.

On Tuesday, the yuan fell to the low end of its daily trading against the U.S. dollar for the fifth consecutive day. During Tuesday's trading session, its exchange rate against the dollar at one point hit 6.3651, forming a sharp contrast with a persistent strengthening prior to last Wednesday.

On Wednesday, the central parity rate of the yuan weakened 8 basis points to 6.3342 against the U.S. dollar, according to the China Foreign Exchange Trading System.

Rising yuan funds have become a problem for the nation's monetary authorities this year, complicating their task of making policies that can serve both steady economic growth and inflation control. By purchasing foreign currencies, the central bank releases an equivalent value of yuan currency, which leads to an increase in liquidity.

The central bank had previously resorted to frequent and regular open market operations and six hikes in banks' reserve requirement ratio (RRR) this year to absorb liquidity as inflation stayed high.

However, the decline in yuan funds registered in October could serve as an easing of liquidity and release pressure on the central bank, Zhao said.

Zhao predicted the fall in yuan funds may continue for some time and possibly lead to further adjustment of banks' RRR.

"If the yuan funds stemming from foreign exchange continue to decrease, then lowering the RRR will be an inevitable option for the central bank in the future," said Chen Bingcai, an expert with the Chinese Academy of Governance.h Amid concerns of slowing economic growth, for the first time in three years the PBOC cut the RRR by 50 basis points on Dec. 5. The latest cut dropped the RRR to 21 percent for large commercial banks and 17.5 percent for mid- and small-sized banks.