Ouyang Xiaohong/Text

The continuous appreciation of the RMB has prompted the central bank to "hit the brakes" and adjust, causing fluctuations in the foreign exchange market.

On November 3, 2026, the People's Bank of China (hereinafter referred to as the "central bank") announced that starting from November 15, the reserve requirement ratio for foreign exchange deposits of financial institutions will be raised from 4% to 6%, an increase of 2 percentage points.

As soon as the news came out, the US dollar instantly rose 0.21% against offshore Chinese yuan. The policy has not yet been implemented, and market expectations have been adjusted first.

On that day, the central parity rate of the Chinese yuan against the US dollar was 6.7150, an appreciation of about 4.7% from the end of 2025; The central parity rate of the Chinese yuan against the euro is 7.4760, with an appreciation of about 10% within the year. The Chinese yuan not only continues to appreciate against the US dollar, but also significantly strengthens against the euro and a basket of currencies. On the previous day, the central parity rate of the Chinese yuan against the US dollar was 6.7146, and the onshore spot exchange rate briefly fluctuated around 6.65, reaching a four-year high.

More than three years ago, the Chinese yuan was under depreciation pressure, and the central bank lowered the reserve requirement ratio for foreign exchange deposits of financial institutions from 6% to 4%; Nowadays, the same tool is adjusted in reverse.

Why does the central bank lightly step on the 'brake'? Is this operation changing the short-term market expectations or the medium - to long-term trend of the RMB exchange rate? How does this affect the lives and businesses of ordinary people?

Exchange 10000 euros, save 7195 yuan

Exchange rate fluctuations affect the cross-border income and expenditure of individuals and businesses.

According to the central parity rate of the Chinese yuan published by the China Foreign Exchange Trading Center, on November 2, 2026, 1 euro to RMB 7.4650 yuan, while a year ago, it was 1 euro to RMB 8.1845 yuan.

Taking the purpose of studying abroad and traveling as an example, according to the official middle price simulation calculation, if residents exchange 10000 euros, they would need 81845 yuan in the same period last year, and only 74650 yuan this year, saving 7195 yuan. During the same period, the exchange rate of 1 US dollar against the Chinese yuan decreased from 7.0867 yuan to 6.7146 yuan. The amount of RMB required for residents to exchange 10000 US dollars has decreased from 70867 yuan to 67146 yuan, a decrease of 3721 yuan.

As for export enterprises, the same round of exchange rate changes may mean another bill.

If a company exports 1 million euros worth of goods to Europe, according to the exchange rate at the two time points mentioned above, its revenue will decrease from approximately 8.1845 million yuan to 7.465 million yuan, a decrease of 719500 yuan. Of course, actual income and profit are also affected by factors such as the timing of foreign exchange settlement, exchange rate hedging, and import costs, and the difference should not be directly regarded as a loss of profit.

It is worth noting that data from the China Foreign Exchange Trading Center shows that during the week of October 30th, the CFETS RMB exchange rate index rose to 103.77, an increase of about 5.9% from 97.99 at the end of 2025, reaching a high level since July 2022. This trade weighted nominal effective exchange rate index reflects the overall strength of the renminbi relative to a basket of currencies. However, to determine export competitiveness, it is still necessary to combine domestic and international relative prices and observe the actual effective exchange rate.

The continuous strengthening of the RMB's external price can occur simultaneously with the demand and profit pressures faced by some domestic industries.

Why raise the reserve requirement ratio for foreign exchange

The reserve requirement ratio for foreign exchange deposits refers to the ratio at which financial institutions deposit a certain proportion of their foreign exchange deposits with the central bank in accordance with regulations, which directly affects the scale of foreign currency funds available to the banking system.

If a bank holds $10 billion in foreign exchange deposits that meet the deposit requirements, the reserve requirement ratio for foreign exchange deposits will increase from 4% to 6%, which means the bank needs to increase its reserve requirement by $200 million.

For the entire banking system, increasing the reserve requirement ratio will tighten the available foreign currency liquidity and may affect exchange rates through foreign currency financing costs, foreign exchange transactions, and market expectations.

Wen Bin, Chief Economist of China Minsheng Bank, stated that the foreign exchange settlement rate of enterprises has significantly rebounded recently, rising from 57.2% in July to 65.3% in September. The stronger the expectation of RMB appreciation, the more inclined some enterprises are to accelerate foreign exchange settlement, and the increase in foreign exchange settlement may further promote RMB appreciation, forming a self reinforcing pro cyclical effect.

Wen Bin estimated that based on a rough calculation of the foreign currency deposit balance of approximately $1.2 trillion at the end of September, this increase of 2 percentage points involves approximately $24 billion in foreign exchange liquidity. He believes that compared to the size of the funds themselves, the signals released by policies are more worthy of attention: preventing the strengthening of unilateral appreciation expectations and avoiding short-term exchange rate overshoots.

However, banks can adjust their asset liability arrangements. In addition, exchange rates are also influenced by factors such as cross-border capital flows, corporate foreign exchange settlements and sales, and international interest rate expectations. Raising the reserve requirement ratio does not necessarily mean that the renminbi will inevitably depreciate.

Historical experience provides a reference. In December 2021, the Chinese yuan continued to strengthen, and the central bank raised the reserve requirement ratio for foreign exchange deposits from 7% to 9%; In September 2023, as the Chinese yuan faces depreciation pressure, the central bank will lower the reserve requirement ratio for foreign exchange deposits from 6% to 4%, increasing the foreign currency funds available to banks.

The operation in November this year happens to be a mirror of 2023. The same tool can be used in reverse in different market environments.

Exchange rate 'new anchor' and fluctuation boundary

So, after more than three years of reverse adjustment of the reserve requirement ratio for foreign exchange deposits, how can market-oriented pricing and countercyclical adjustment be balanced?

In the past, the US dollar index and the China US interest rate differential were important variables for observing the RMB exchange rate. The strengthening of the US dollar and the higher interest rate of US treasury bond bonds than that of Chinese bonds usually mean that the RMB is under certain pressure of depreciation. But this round of market trend did not fully follow this logic.

The research of Cheng Shi, chief economist of ICBC International, shows that as of September 24, the yield difference between China and the US 10-year treasury bond bonds will expand by 117 basis points in 2026, and the RMB exchange rate against the US dollar will still appreciate by 4.1%. The weekly model found that since 2025, the explanatory power of the China US interest rate differential on the RMB exchange rate has weakened.

This means that the forces and weights that affect the price of the Chinese yuan at different stages are changing. Domestic exchange settlement, cross-border capital flows, and market expectations are increasingly needed to be included in the exchange rate analysis framework.

The rebound of enterprise foreign exchange settlement rate is a window to observe this change. Continuous appreciation may drive some companies to accelerate foreign exchange settlement, forming a feedback of mutual reinforcement between market transactions and exchange rate expectations. If the expectation is reversed, the centralized adjustment of position may amplify short-term fluctuations.

In Wen Bin's view, the central bank's previous RMB exchange rate policy stance was clear, without setting a target exchange rate level. However, if the exchange rate fluctuates significantly in the short term and the market experiences "herd behavior" and irrational expectations, the central bank will introduce market-oriented measures to prevent short-term destructive overshoot of the exchange rate.

Therefore, on November 3rd, the central bank announced an increase in the reserve requirement ratio for foreign exchange deposits, which can be observed within this policy framework: market supply and demand determine the long-term formation of exchange rates, while countercyclical tools focus on smoothing short-term fluctuations and preventing excessive strengthening of unilateral expectations.

At the same time, the RMB interest rate policy is also being adjusted. On November 2nd, the central bank began conducting overnight reverse repo at a rate of 1.25% in accordance with the new open market operating framework; The interest rate for stock repurchases, increased holdings, and refinancing has been lowered from 1.25% to 1%.

The former clarifies the reference for short-term policy interest rates, while the latter reduces financing costs in specific areas; The adjustment of the reserve requirement ratio for foreign exchange deposits affects the foreign currency liquidity of the banking system. Different tools have their own policy objectives and transmission channels.

The RMB interest rate and exchange rate are undergoing new pricing tests in different markets. How to make the market fully reflect the supply and demand of funds, while preventing unilateral trading from amplifying financial risks, or the practical issue of monetary policy.

There are three sets of changes worth paying attention to before and after the adjustment of the reserve requirement ratio for foreign exchange deposits takes effect on November 15th.

One is how the domestic US dollar fund price and offshore RMB exchange rate change, observing the actual impact of foreign currency liquidity adjustments.

The second is whether the enterprise's foreign exchange settlement and sale, forward foreign exchange purchase, and hedging behavior have changed, and whether the expectation of unilateral appreciation can cool down.

The third is how the Renminbi operates against a basket of currencies and the real effective exchange rate, observing whether the Renminbi's strength continues and its impact on different trading entities.

The marketization of exchange rates requires that market supply and demand fully reflect differences; Countercyclical adjustment aims to prevent unilateral trading and short-term overshoot from amplifying financial risks.

The 'new anchor' of the Chinese yuan does not imply that the exchange rate will only change in one direction. The market forms prices, while policies maintain the boundaries of volatility.

(Author Ouyang Xiaohong)