On May 31, the people's Bank of China decided to raise the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from June 15, 2021, that is, from the current 5% to 7%.

This policy change will to some extent reduce the supply of dollars in the onshore foreign exchange market and convey the central bank's intention to maintain two-way fluctuations in the RMB exchange rate. As of April 2021, the balance of foreign exchange deposits of financial institutions is about 1 trillion US dollars, and the increase in foreign exchange reserves this time tightens the supply of US dollar liquidity in the onshore foreign exchange market by about 20 billion US dollars, which is not a large total. the average daily turnover in the onshore RMB foreign exchange market in the past week is about 41.4 billion US dollars.

When has it been raised in history?The current foreign exchange deposit reserve system was formed in November 2004. In January 2005, the central bank uniformly adjusted the foreign exchange deposit reserve ratio to 3%. In response to the gradual release of appreciation pressure after the exchange rate reform in July 2005, foreign exchange deposit reserves were increased by 1 percentage point in September 2006 (announced on August 14) and May 2007 (announced on April 25). Since then, the foreign exchange deposit reserve ratio has remained unchanged at 5%.

Distinguish between "foreign exchange deposit reserve" and "foreign exchange risk reserve".Both are the tools of the central bank's foreign exchange macro-prudential control. The "foreign exchange deposit reserve" corresponds to the "RMB deposit reserve", which is the deposit reserve paid by the bank to the central bank according to a certain proportion of deposits. When the required reserve ratio of foreign exchange deposits increases, the onshore foreign exchange liquidity will be tightened, and the pressure of RMB exchange rate appreciation may be alleviated.Foreign exchange risk reserveIntroduced by the central bank in October 2015, it is levied on financial institutions that carry out forward foreign exchange sales for customers. To raise the foreign exchange risk reserve is to increase the restriction on the forward sale of foreign exchange, which may ease the depreciation pressure of the RMB exchange rate.Historically, the foreign exchange risk reserve has been adjusted four times:

1) on August 31, 2015, the notice on strengthening the Macro-prudential Management of forward Foreign Exchange sales requires that from October 15, 2015, financial institutions carrying out forward foreign exchange sales for clients should deposit foreign exchange risk reserves, with a reserve ratio tentatively set at 20%. The freeze period is one year, and the interest rate is tentatively set at zero (the background is the expectation of RMB depreciation).

2) on September 11, 2017 (announced on September 8), the foreign exchange risk reserve ratio was lowered to 0 (against the backdrop of RMB appreciation expectations).

3) on August 6, 2018 (announced on August 4), the foreign exchange risk reserve ratio was raised to 20% (against the backdrop of RMB depreciation expectations).

4) the foreign exchange risk reserve ratio was lowered to 0 on October 12, 2020 (announced on October 10, 2020) (background is the expectation of RMB appreciation).

What other macroprudential tools have the central bank used recently?

1) encourage "going out"Encourage Chinese enterprises to increase foreign loans and reduce the demand for foreign exchange settlement. On January 5, 2021, the central bank and safe raised the macro-prudential adjustment coefficient of overseas lending by domestic enterprises from 0.3 to 0.5, that is, the proportion limit of lenders' overseas lending balance not exceeding 30% of their owners' equity was raised to 50%.

2) regulate and control "flow in"Regulate and control Bank of China Ltd. and enterprises' overseas financing. On January 7, 2021, the central bank and safe lowered the macro-prudential adjustment parameter of cross-border financing from 1.25 to 1, reducing the upper limit of risk-weighted balance of cross-border financing. On December 11, 2020, the central bank and safe have lowered the macro-prudential adjustment parameter for cross-border financing of financial institutions from 1.25 to 1.

Historically, within a week after the introduction of policies to ease expectations of appreciation (raising foreign exchange deposit reserves in August 2006 and April 2007, lowering foreign exchange risk reserves in October 2020, and encouraging going out and regulating inflows in January 2021), the exchange rate of the RMB depreciated by about 0.1-0.4% against the US dollar.