China to raise reserve requirement for forward forex trading to 20%

China's central bank announced on Monday that it will elevate the foreign exchange risk reserve ratio for forward forex trading from zero to 20 percent, starting Wednesday.

The People's Bank of China (PBOC) slashed the rate from 20 percent to zero in October 2020.

Monday's move aims at stabilizing forex market expectations and strengthening prudent management at the macro level, according to a statement from the PBOC.

The increase will help maintain the supply-demand balance in the country's forex market, said Wen Bin, chief economist at China Minsheng Bank. Affected by the US Federal Reserve's rate hikes, the currencies of many economies have weakened against the US dollar, he said.

The central parity rate of the Chinese currency renminbi, or the yuan, weakened 378 pips to 7.0298 against the US dollar Monday, according to the China Foreign Exchange Trade System.

There is no ground for the yuan to weaken for long, Wen said.

China's sound economic fundamentals, tamed inflation, as well as stability of international settlements will help render the yuan exchange rates and the forex market stable, according to Wen.