After three and a half years, the central bank adjusts the foreign exchange risk reserve ratio for forward foreign exchange sales, significantly reducing the cost of corporate forward hedging.

Recently, the Chinese yuan has maintained a strong upward momentum. Some foreign trade companies told Caixin that the continued appreciation of the yuan has significantly increased foreign exchange gains and losses pressure.

To support companies in managing exchange rate risks, the People’s Bank of China (PBOC) announced a major policy today, deciding to reduce the foreign exchange risk reserve ratio for forward sales from 20% to 0% starting March 2, 2026. This is the first adjustment to the foreign exchange risk reserve ratio since September 2022.

A bank official told Caixin that this adjustment clearly reveals regulatory intentions. In the future, the yuan’s exchange rate is likely to remain within a narrow two-way fluctuation range. “After the reserve ratio is lowered to 0%, the cost for importers to lock in exchange rates forward will be greatly reduced.”

Several experts told Caixin that lowering the foreign exchange risk reserve ratio for banks’ forward sales will directly reduce the cost for banks to handle forward sales, thereby lowering companies’ forward foreign exchange purchase costs. “This will encourage companies to engage in forward foreign exchange purchases, effectively reducing their exchange rate risk management costs. More importantly, it signals the regulatory authorities’ intention to prevent the yuan from appreciating too rapidly, which helps stabilize market expectations.”

First reduction in years, lowering corporate forward purchase costs

After the Spring Festival holiday, the yuan exchange rate experienced a “good start.” Yesterday, both onshore and offshore RMB against the US dollar broke through the 6.84 mark, with offshore RMB even surpassing 6.83, hitting a new high since April 2023. Against the backdrop of the yuan’s strong appreciation, export-oriented companies are noticeably affected.

“Yesterday, the yuan appreciated, and there is some pressure from foreign exchange gains and losses. Due to the obvious upward trend of the yuan, we plan to lock in exchange rates at high points,” a finance officer from a foreign trade company told Caixin.

Today, to promote the development of the foreign exchange market and support companies in managing exchange rate risks, the PBOC decided to reduce the foreign exchange risk reserve ratio for forward sales from 20% to 0% starting March 2, 2026. The PBOC will continue guiding financial institutions to optimize foreign exchange hedging services for companies and keep the yuan’s exchange rate basically stable at a reasonable and balanced level.

It is understood that the foreign exchange risk reserve ratio for forward sales is an anti-cyclical macroprudential management tool created by the PBOC for banks’ forward sales business. It was first incorporated into the policy framework after the August 11, 2015, exchange rate reform, requiring financial institutions to deposit interest-free reserves proportional to their contracted amount, which influences forward sales prices and market trading behavior.

In September 2022, facing a continuous decline in the USD/CNY exchange rate, the PBOC increased the reserve ratio from 0% to 20%. Now, with the recent reduction, companies’ forward purchase costs are expected to decrease, easing pressure.

Wen Bin, Chief Economist at Minsheng Bank, calculated that at a 20% reserve ratio, each $100 of forward sales requires banks to freeze $20 without interest, increasing costs for companies’ forward purchases.

“Now, with the reserve ratio lowered from 20% to 0%, banks no longer need to freeze funds, and the cost of forward purchases will decrease,” Wen Bin told Caixin.

An authoritative source told Caixin that this move can lower companies’ forward purchase costs, encourage them to hedge foreign exchange risks actively, and support companies in using derivatives reasonably to manage risks.

“This is the first time in nearly three and a half years that the PBOC has used this tool again. The reduction in the forward sales risk reserve ratio essentially signifies a reasonable exit from previous measures, returning foreign exchange policies to a neutral stance, and supporting companies in better conducting exchange rate hedging,” the expert said.

“After the reserve ratio is lowered to 0%, the cost for importers to lock in exchange rates forward will be significantly reduced, and banks will further assist companies in managing exchange rate risks through derivatives,” a bank official told Caixin.

By 2025, the company’s hedging ratio will rise to 30%, and the proportion of trade settled in RMB will also increase to nearly 30%.

“This means that 60% of export companies are less affected by exchange rate risks. In the future, these proportions are expected to increase further, which will also help maintain exchange rate stability,” the expert said.

Wang Defa, researcher at Changshu Rural Commercial Bank, told Caixin, “Lowering the foreign exchange risk reserve ratio from 20% to 0% will stimulate banks’ forward sales business, which in turn will increase residents’ and companies’ forward purchases, offsetting some private sector foreign exchange settlement in the short term and stabilizing the RMB exchange rate.”

Wang Qing, Chief Macro Analyst at Orient Securities, said, “Lowering the foreign exchange risk reserve ratio for banks’ forward sales will directly reduce their costs, encouraging companies to engage in forward purchases and effectively lowering their exchange rate risk management costs.”

Recent rapid yuan appreciation prompts regulatory measures to stabilize the market

After the Spring Festival, the yuan appreciated rapidly against the US dollar, continuing the relatively strong trend since December 2025. Today, the PBOC’s decision to lower the foreign exchange risk reserve ratio is seen by many market participants as a signal that regulators aim to prevent the yuan from appreciating too quickly, helping to stabilize market expectations. “This indicates that regulators have already taken action to curb the recent rapid appreciation of the yuan, which is expected to ease the yuan’s fast appreciation momentum after the holiday.”

“Clearly, this adjustment to the foreign exchange risk reserve ratio reveals regulatory intent. The yuan’s exchange rate is likely to remain within a narrow two-way fluctuation range,” said the bank official.

Wen Bin noted that the direct impact of lowering the reserve ratio on foreign exchange demand may be limited, but it sends a clear policy signal—a gentle “cooling” to the market’s bullish bets on the yuan’s appreciation, indicating that the central bank’s goal remains to keep the yuan’s exchange rate stable at a reasonable and balanced level.

Wang Qing believes that, in the short term, given the expected continuation of external stabilization, China’s exports will maintain relatively rapid growth in the first quarter. Coupled with current market sentiment, the likelihood of a sharp rebound in the US dollar index is low, and the yuan is expected to remain relatively strong in the near future. Notably, recent fluctuations in US tariffs have had little impact on the dollar index or the yuan exchange rate.

“If the yuan continues to appreciate rapidly, including raising the macroprudential adjustment coefficient for offshore loans by domestic enterprises, lowering the macroprudential adjustment parameters for cross-border financing for companies and financial institutions, or increasing the foreign exchange deposit reserve ratio, other market stabilization tools may also be employed, and the central parity may be further adjusted,” Wang Qing said.

Several experts pointed out that the future trend of the yuan exchange rate still faces significant uncertainty, and companies should prepare for foreign exchange hedging.

Authorities warn that the complex and volatile international environment—rising geopolitical conflicts, prolonged Russia-Ukraine war, turmoil in the Middle East, sudden political events in Latin America, and disputes over Greenland—may intensify fluctuations in the global foreign exchange market and impact the yuan’s exchange rate. As markets play a larger role in exchange rate formation, the yuan may fluctuate both upward and downward.

“Companies and financial institutions should avoid blindly following trends or speculating on exchange rates. They should adhere to a neutral stance on exchange rate risks and strengthen risk management,” Wen Bin advised.

(Source: Caixin)