Yuan Declines as Reserve-Ratio Cut Bolsters Currency Supply

China’s yuan fell the most in a week after the central bank reduced the amount of cash lenders must set aside in reserve for the second time this year, bolstering supply of the currency.

The People’s Bank of China cut the main reserve-requirement ratio by one percentage point, the most since the global financial crisis, to 18.5 percent effective Monday. This came after data showed gross domestic product expanded 7 percent in the first quarter, the slowest pace since 2009. In the U.S., reports on retail sales, manufacturing and jobless claims all missed forecasts, leading only 12 percent of economists in a Bloomberg survey to predict the Federal Reserve will raise interest rates in June, down from 45 percent in a March poll.

The reserve-ratio cut “will increase the supply of yuan and hence the depreciation pressure,” said Li Liuyang, a Shanghai-based strategist at Bank of Tokyo Mitsubishi UFJ (China) Ltd. A significant yuan decline is unlikely as the U.S. may delay interest-rate increases because data have come in below estimates, Li said.

The yuan dropped 0.06 percent, the most in a week, to close at 6.2015 a dollar in Shanghai, China Foreign Exchange Trade System prices show. The PBOC raised its daily fixing by 0.02 percent to 6.1255, the strongest level since Jan. 22. The gap between the onshore spot rate and the fixing was 1.24 percent, within the 2 percent limit. In Hong Kong’s offshore market, the currency slipped 0.1 percent to 6.2008, according to data compiled by Bloomberg.

China’s foreign-exchange reserves dropped the most on record to $3.73 trillion in the first quarter, central bank data showed on April 14. Yuan positions on the PBOC’s balance sheet, a barometer of capital flows, slid 252.1 billion yuan ($40.6 billion).

The central bank has to cut the reserve ratio as its fund injections cannot fully offset outflows, UBS AG economists led by Wang Tao and Harrison Hu wrote in a note Monday. The latest reduction can help arrest the momentum of liquidity tightening and contain financial risks, they said.

— With assistance by Fion Li, and Ran Li

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