This time, though, according to what state-owned commercial bank insiders told China Business News, it is RMB instead of the USD that is being refunded to commercial banks, which means that the State Administration of Foreign Exchange (SAFE) will not be selling any of its $200 billion of bank reserve assets to lower the deposit reserve ratio.
From August 2007 to May 2008, PBoC increased the reserve ratio nine times by a total of six percentage points. All of the five major commercial banks representing all of the national commercial banks deposit reserve currency in the form of U.S. dollars.
Based on the balance at financial institutions of about 45 trillion yuan (RMB) by the end of August, the lowering of the reserve ratio by 0.5 percentage points represents about 225 billion yuan. Usually US $ accounts for 70% of the funds frozen by the central bank. According to the current exchange rate, the reserve returned to the major national banks totals approximately US$23 billion.
PBoC’s allocating of funds in local currency means it does not need to sell foreign currency on the international market. Therefore, the reserve ratio reduction will not move international currency markets, especially against the USD.
Since the reserve ratio adjustment in August 2007, national commercial banks have been required to deposit reserves in the form of foreign exchange. Foreign exchange funds frozen in this way have reached more than $200 billion.
The process of depositing reserves in the form of foreign exchange runs like this: based on its position, a commercial bank firstly determines and sets aside the local reserves required by the central bank, then buys dollars with this money on the foreign exchange market or gets them directly from their own foreign exchange exposure, and at last turns in the dollar amount corresponding to the local currency amount required by PBoC.
When the bank deposits this reserve, PBoC signs an agreement with it. If the deposit reserve rate is reduced in the future, the bank will get its refund, in RMB or dollars, at an agreed foreign exchange rate, and it is the central bank that takes the exchange rate risk during the holding of the reserves.
The reserve department of SAFE is in charge of the management of these reserves, and at the same time operates foreign exchange reserves entrusted by the central bank. In other words, bank reserves in the form of foreign exchange collect by the PBoC, get the same operation and management as foreign exchange reserves.
When lowering the reserve requirement, the central bank refunds bank reserves in local currency, which means that the central bank will not need to sell this part of foreign exchange assets to deal with it.
Against the backdrop of the US financial storm, some said China would continue to buy U.S. dollar-denominated assets such as bonds, while some pointed out the central bank would adhere to dollar-denominated assets considering risk factors. The market for the time being does not need to worry about selling the $200 billion foreign exchange reserve since the central bank has determined to adjust the reserve ratio in local currency.
However, if the central bank continues to lower reserve ratio, which currency will it refund? Dollars ? RMB ? There is concern about the issue.