China Tightens Dollar Liquidity to Moderate Yuan Appreciation

The People’s Bank of China’s (PBOC) intervention to raise the foreign exchange reserve requirement ratio amid the yuan’s sustained rally has delivered a reprieve for China’s broader export sector, as the measure is expected to partly ease appreciation momentum driven by the country’s enormous trade surplus,analysts say.

China’s goods trade surplus mounted to a record US$938.1 billion in the January-September period, rising from $726.2 billion in the same period a year prior. With the full year trade surplus widely expected to be higher than last year’s US$1.2 trillion record, a larger surplus brings higher foreign exchange settlement volumes.

A feedback loop – strengthening appreciation expectations, concentrated foreign exchange settlement by exporters and accelerated renminbi gains was taking hold prior to the new PBOC policy, according to a Tuesday research note by Citic Securities in Beijing.

This dynamic has hurt China’s exporters when they convert their dollar proceeds into yuan. It amounted to a “prisoner’s dilemma” for every exporter, said Kevin Li, a Shanghai textile product exporter with a predominantly US client base.

Li described the PBOC’s measure as a “breather” for his business. He has paused foreign exchange settlement for now and was taking a wait-and-see stance, he said.

“The policy kicks in on November 15. It has at least put a stop to the yuan’s sharp appreciation for the moment.” The PBOC said Tuesday it would lift the reserve requirement ratio for foreign exchange deposits by 2 percentage points to 6 per cent. Citic Securities expected the adjustment would immobilise $24 billion of dollar liquidity.

In response, the onshore yuan weakened more than 300 basis points yesterday and remained subdued at midday on Wednesday, with the yuan trading above 6.68 yuan per US dollar. A majority of Li’s contracts were signed last year, when the onshore yuan was trading at more than 7 yuan per US dollar. The currency has gained about 4.3 percent year-to-date. By way of comparison, his firm’s net profit margin stood at around 7 percent in 2025.

“Every US dollar FX [foreign exchange] settlement means a loss for me now. I’m hoping the yuan posts only moderate appreciation this December,” Li added.

For China’s exporters, December is the most burdensome month: it is when they routinely settle all outstanding supplier payables, plus wage and tax payments.

The predicament confronting exporters like Li formed the central bank’s “underlying calculus”, according to the Citic Securities note.

“Against a backdrop of dollar strength and continued Federal Reserve tightening, the current appreciation is driven nearly entirely by onshore FX settlement. An overly sharp pace of gains that directly eats into corporate margins is likely what sits behind the central bank’s underlying calculus,” the note stated.

Official figures show domestic banks recorded US$2.38 trillion in cumulative foreign exchange settlement from January through September, surging 28.3 per cent year on year. Foreign exchange sales for the same period came in at US$1.98 trillion, a 10.8 per cent year-on-year increase.

The Citic Securities report argued the PBOC’s intervention – deployed before appreciation expectations could become “self-reinforcing” – partly seeks to “safeguard” the economy’s resilience.

Xu Ying, chief analyst at Shanghai-based Orient Futures, shared the view.

“With export growth and the trade surplus posting substantial gains in 2026, FX settlement is set to remain elevated into year-end and lend further support to yuan appreciation. The PBOC’s move to lock up a portion of US dollar liquidity should partially curb herding behaviour and help ease pressure on exporters,” Xu said. Even so, it may prove to be just a breather for Chinese exporters – the yuan’s appreciation trend cannot be reversed.

In a Wednesday note, Lillian Li, vice-president of the credit strategy and guidance group at Moody’s Ratings, said the PBOC’s step showed policymakers were uneasy with the speed of renminbi appreciation.

“By tightening onshore US dollar liquidity, the measure should moderate rather than reverse the appreciation, given strong export demand,”Li noted. It marks the second time this year the PBOC has taken steps to temper the yuan’s rally. The PBOC announced at the end of February that it would scrap risk reserve requirements for foreign exchange forward contracts in a move to encourage dollar buying.