China lifts FX reserve requirement to 6% to slow the yuan's rally

China's central bank said on Tuesday, Nov 3, that it will raise the foreign exchange reserve requirement ratio by 2 percentage points to 6% from 4%. The move aims to slow the yuan's strong rally, and USD/CNY stood at 6.6717 in Asian trading, up 0.52% from the previous close of 6.6374.

What happened

The People's Bank of China announced that financial institutions must hold more foreign currency as reserves. The new ratio of 6% takes effect on Nov 15. The previous ratio was 4%, so the requirement rises by 2 percentage points.

The measure is meant to absorb US dollar liquidity from the financial system. The step may remove about US$24 billion from the system. It has been described as one of the strongest moves yet to slow the pace of the currency's gains.

The onshore yuan reacted at once. It fell 0.37% to 6.6728 per dollar, its sharpest daily fall in six months. That means the currency lost ground against the dollar on the day the central bank spoke.

Why it matters

The decision reverses a policy choice from September 2023. At that time the PBOC lowered the FX reserve requirement ratio. That earlier cut was a move to stem the yuan's rapid losses. The new increase points the other way, because the concern now is the speed of the currency's gains.

The yuan has risen more than 5% in 2026. Several factors support it: exports, trade surpluses and corporate sales of foreign currency. Companies that earn dollars and convert them into yuan add to demand for the Chinese currency.

An FX reserve requirement works by changing how much foreign currency banks must keep with the central bank. A higher ratio leaves them less dollar liquidity to lend or trade. That can reduce the supply of dollars available in the market.

For a region whose economies are tied to Chinese trade and supply chains, the direction of the yuan matters well beyond China. A faster rise in the currency changes the price of Chinese goods for foreign buyers. It also changes the cost of imports for Chinese firms, so the central bank's choice on pace has wide effects.

Market impact

The immediate effect was a weaker yuan against the dollar. The onshore rate of 6.6728 per dollar marked the largest one-day decline in six months. The market data shows USD/CNY at 6.6717, a rise of 0.0343, or 0.52%, from the previous close of 6.6374.

Market participants see the step as mainly symbolic. The size of the possible liquidity effect, about US$24 billion, is modest next to the forces that have lifted the yuan this year. Those forces include trade surpluses and corporate FX sales, which the new rule does not directly change.

The yuan's gain of more than 5% in 2026 remains intact despite the day's fall. The one-day move shows how quickly the currency can react to a signal from the central bank.

What to watch next

The first date is Nov 15, when the higher ratio takes effect. After that, the question is whether the reserve change slows the yuan's advance or only interrupts it for a short time.

Trade and export data will remain relevant, since exports and surpluses are among the factors behind the yuan's 2026 gains. Corporate FX conversion is another channel to follow, because company sales of foreign currency have also supported the yuan this year. Any further steps by the central bank would show how far it wants to go in slowing the currency's rise.