The People's Bank of China (PBOC) has executed a dual-pronged strategy to reinforce monetary stability, holding its USD/CNY reference rate steady while simultaneously cutting a key macroprudential tool to zero. On March 15, 2025, the PBOC set the daily USD/CNY central parity rate at 6.9228, unchanged from the previous day's fixing. This decision, described as a "crucial signal of monetary stability," was made amid global currency volatility and is seen as the PBOC anchoring expectations for the world's second-largest economy.
Concurrently, in a significant policy shift announced earlier on October 26, 2023, the PBOC cut the foreign exchange risk reserve ratio for financial institutions to 0%, effective immediately. This ratio is a counter-cyclical tool that requires banks to set aside a portion of their forex forward sales as a non-interest-bearing reserve. Reducing it to zero lowers the cost for financial institutions to sell dollars for yuan forwards, a move aimed at increasing dollar supply in the market and supporting the yuan's value by making it less expensive to hold.
Strategic Context and Rationale: The unchanged reference rate at 6.9228 suggests the PBOC views current market conditions as balanced. The rate is calculated using a formula incorporating the previous day's closing spot rate and moves in a basket of major currencies, allowing the onshore yuan (CNY) to trade within a 2% band. Experts like Dr. Li Wei, a former PBOC researcher, note that a stable fix reduces hedging costs for traders, discourages speculative 'hot money' flows, and supports the renminbi's internationalization by fostering predictability.
The decision to cut the FX risk reserve ratio to 0%—the third such elimination after moves in 2017 and 2020—is a response to depreciation pressures against a strong U.S. dollar. It aims to stabilize the yuan's exchange rate and improve liquidity for domestic enterprises engaged in foreign trade. The PBOC's approach avoids blunt instruments like direct interest rate cuts, instead using targeted measures to manage specific market frictions.
Market Reaction and Implications: Following the reference rate announcement, market reaction was muted. The offshore yuan (CNH) traded around 6.9250, and onshore spot yuan (CNY) opened virtually unchanged, indicating the stability signal was largely priced in. The reduction of the FX risk reserve ratio is expected to increase yuan liquidity in the banking system, lower costs for dollar-yuan forward contracts, and have a stabilizing effect on the CNY/USD exchange rate by easing selling pressure.
These coordinated actions underscore the PBOC's sophisticated and proactive management of its managed float regime, balancing domestic economic objectives—such as export competitiveness and financial stability—with its ambitions for the yuan's growing international role. The central bank signals a commitment to currency stability as a cornerstone for both domestic growth and global economic integration.
