Photographer: Nelson Ching/Bloomberg

Cutting Bank Reserve Ratios Will Pressure Yuan Lower, PBOC Says

A cut to lenders’ reserve requirements would add too much liquidity to the financial system and lead to yuan depreciation expectations, China’s central bank said late Friday.

Frequent reductions will also spur declines in borrowing costs, the People’s Bank of China said, adding that the relatively strong signal from a lowering of reserve-requirement ratios could fuel speculative currency trading. The monetary authority, in its second-quarter policy implementation report, said it will use multiple tools to maintain reasonable growth in credit and aggregate financing.

Iterating that it will follow prudent monetary policy, the PBOC said it will promote interest-rate liberalization, work on structural reforms and increase the yuan’s two-way flexibility while keeping the exchange rate basically stable at an equilibrium level. It added that its “stable monetary policy” has provided reasonable liquidity to the banking system, steady growth in monetary credit and financing, stable interest levels and more flexibility of the yuan in the first half of this year.

The PBOC statement comes at a time of increasing speculation that policy makers are supporting the exchange rate before China hosts a Group of 20 meeting in September and ahead of the yuan’s entry into the International Monetary Fund’s reserves basket on Oct. 1. The central bank was suspected of controlling declines last month and had officials talking up the exchange rate.

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