China’s central bank will cut the foreign-exchange risk reserve ratio for forward FX sales to 0% from 20%, effective March 2, 2026, aiming to enhance currency market development and support companies’ exchange-rate hedging needs. The PBOC said it will continue encouraging financial institutions to strengthen hedging services while maintaining the renminbi broadly stable at a reasonable and balanced level.
Typically, you use a 20% “penalty” ratio to stop the currency from falling (by making it expensive to bet against it). Removing it when the Yuan is already strong seems counterintuitive at first, but there are four strategic reasons why the PBOC would do this:
1. Slowing Down “Too Much” Appreciation
A currency that is too strong is a double-edged sword. While it shows economic strength, it makes Chinese exports more expensive for the rest of the world.
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By cutting the ratio to 0%, the PBOC makes it cheaper for companies to buy US Dollars (forward sales).
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This increase in demand for Dollars acts as a natural “brake” on the Yuan’s rise without the PBOC having to intervene directly in the markets.
2. Punishing “One-Way Bets”
The PBOC hates “herd behavior.” If everyone believes the Yuan will only go up, speculators pile in, creating a bubble.
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When the ratio was 20%, it was expensive to bet on a weaker Yuan.
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By moving to 0%, the PBOC is “leveling the playing field.” They are making it easier for market participants to take the opposite side of the trade, which creates two-way volatility and prevents a speculative runaway in the Yuan’s value.
3. Normalizing Policy (The “Exit” Strategy)
The 20% ratio is considered a “counter-cyclical” tool—it’s an emergency measure.
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Keeping an emergency measure active when the currency is strong sends a confusing signal to global markets.
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Moving to 0% signals that the PBOC believes the market has returned to a “healthy” state and no longer needs “training wheels” or artificial barriers. It is a sign of confidence that the Yuan can stand on its own without restrictive rules.
4. Reducing the “Cost of Doing Business”
For a Chinese importer who needs to buy Dollars six months from now, that 20% reserve was essentially a dead-weight cost passed down from their bank.
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Even if the Yuan is strong, these companies still need to hedge to ensure their profit margins.
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Removing the ratio lowers their operational costs, effectively acting as a targeted stimulus for companies involved in international trade.
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Watch for the PBOC’s next move. If the Yuan continues to rocket upward despite this change, they may use “window guidance” (calling bank executives to suggest they buy more Dollars) or even raise the Foreign Exchange Reserve Requirement Ratio (FX RRR), which forces banks to hold more actual USD in vaults, taking it out of circulation.
This article was written by Eamonn Sheridan at investinglive.com.
