HONG KONG: China’s Yuan weakened on Thursday after the central bank cut banks’ reserve requirement ratio for the first time in over two years to combat an economic slowdown and looming deflation.
The cut also highlights a pick-up in capital outflows in recent months, which have removed a key support for the currency. The latest data showed a $91 billion deficit under the capital account in the fourth quarter.
As capital outflows have gained momentum, the yuan has been pushed towards the weaker limit of its trading band. Large state-owned banks have had to step into the currency market to sell dollars to ensure the yuan’s weakness doesn’t trigger even larger outflows.
On Thursday, the People’s Bank of China set the midpoint rate at 6.1366 per dollar prior to the market open, weaker than the previous fix of 6.1318.
Spot yuan opened at 6.2560 per dollar and was at 6.2536 at midday, 59 pips away from the previous close and a few pips away from the trading limit.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
