The central bank uses this tool again after three and a half years. What impact will lowering the forward foreign exchange risk reserve requirement ratio have?

Today (the 27th), the People’s Bank of China announced that starting March 2, 2026, the foreign exchange risk reserve requirement ratio for forward foreign exchange sales will be reduced from 20% to 0%.

Recently, the RMB has appreciated rapidly against the US dollar, with onshore and offshore rates returning to levels seen three years ago.

This reduction in the forward foreign exchange risk reserve ratio is also the central bank’s first use of this tool in three and a half years. What exactly is this tool? What are its implications? Let’s take a look.

What is the Foreign Exchange Risk Reserve?

The concept of the foreign exchange risk reserve dates back to 2015. After the August 11th reform of the exchange rate regime, the RMB experienced strong depreciation expectations. To stabilize market expectations, the central bank introduced a series of macroprudential management measures, one of which was the foreign exchange risk reserve.

The foreign exchange risk reserve ratio is a transparent, non-discriminatory, price-based countercyclical macroprudential tool. The central bank charges financial institutions a foreign exchange risk reserve, which is equivalent to requiring them to set aside funds to cover potential future losses. Through price transmission, this suppresses procyclical behaviors of enterprises engaging in forward foreign exchange purchases.

Since its establishment in 2015, the reserve ratio has been adjusted five times, including this latest change. Overall, adjustments to the reserve ratio tend to have only short-term effects on the RMB exchange rate and do not alter the fundamental trend of the currency market; however, because the central bank often makes additional statements or actions related to exchange rate regulation afterward, these signals are more significant in guiding market expectations.

So, what specific impacts will this adjustment have?

Helps Reduce Enterprises’ Forward FX Purchase Costs

The central bank announced that the forward foreign exchange risk reserve ratio will be lowered from 20% to 0, which can reduce the cost for enterprises to purchase foreign exchange forward and encourage them to actively hedge currency risks using foreign exchange derivatives. This also supports enterprises in managing exchange rate risks more effectively.

When the reserve ratio is 20%, banks need to freeze $20 of non-interest-bearing funds for every $100 of forward foreign exchange sales, increasing the cost of forward FX purchases. Now, with the ratio lowered to 0, banks no longer need to freeze funds, and the cost of forward FX purchases will decrease accordingly.

This is the central bank’s first use of this tool in nearly three and a half years. The reduction in the forward foreign exchange risk reserve ratio essentially signifies a reasonable exit from previous measures and a return to a neutral foreign exchange policy.

Supports Better Exchange Rate Hedging for Enterprises

This reduction helps financial institutions provide enterprises with more cost-effective currency risk management products. By 2025, the enterprise hedging ratio is expected to rise to 30%, and the proportion of trade settled in RMB has increased to nearly 30%. This means about 60% of export-oriented enterprises are less affected by exchange rate risks. These ratios are expected to further improve, which will also help maintain exchange rate stability.

RMB Exchange Rate Still Faces Significant Uncertainty

Experts say that the external environment remains complex and volatile in the near future, and the RMB exchange rate will continue to face considerable uncertainty. Export enterprises should prepare for currency hedging. Currently, the international situation is complicated, with increased geopolitical conflicts, prolonged Russia-Ukraine war, instability in the Middle East, sudden political events in Latin America, and disputes over Greenland—all of which could intensify global forex market fluctuations and disrupt RMB exchange rate trends. As the market plays a larger role in exchange rate formation, the RMB may fluctuate both upward and downward. Enterprises and financial institutions should avoid blindly following trends or speculating on exchange rates, and instead adhere to a neutral risk management approach.

Source: CCTV News

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