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China has increased foreign exchange reserve requirements for the second time this year, up in total from 4% to 9% starting on Wednesday.
This is the first time China has increased its foreign exchange deposit reserve ratio twice within a year, to 7% from 5% in June and now to 9% this December.
The move is aimed at ‘stabilizing’ the USD/CNY exchange rate after the Chinese yuan has seen one of its longest bull run against the dollar in the past two years.
It comes at the same time as a lowering of the bank deposit reserve ratio rate that is expected to release circa $200 billion of liquidity.
This follows a default by Evergrande and Kaisa, another big Chinese property developer as Chinese authorities put the breaks on heavily indebted real estate expansion.
To cushion the blow, their strategy for now seems to be both direct liquidity injection with an implicit promise of more to come if the situation worsens, and compensating for a slowdown in the property market through increasing exports by devaluing CNY.
CNY sharply dropped from 6.34 to 6.37 to the dollar, as pictured above, with it unclear whether there’s a correction or a trend reversal to be expected as cny is weakened.
In which case you’d expect Chinese citizens and businesses to hedge with a global asset like bitcoin which briefly rose to $50,000, but has dived to $48,000 once again for unclear reasons.
Buying or selling bitcoin in itself remains legal in China, thus if the trend in cny reverses, we may see an increase in demand.
