Why did the central bank suddenly intervene to stabilize the exchange rate?

Author: Ba Jiuling , Wu Xiaobo Channel

As the RMB exchange rate continued its rapid appreciation, the central bank finally intervened to stabilize the rate.

At 8:00 AM on February 27, 2026, the People's Bank of China issued an announcement: In order to promote the development of the foreign exchange market and support enterprises in managing exchange rate risks, it has decided to lower the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0, effective March 2, 2026.

The announcement was brief, but its effect was immediate. The offshore RMB exchange rate, which was being traded, quickly depreciated by 0.3% from 6.839 RMB to 1 USD, reaching a low of 6.859, thus putting a pause on the continuously appreciating RMB.

So, what exactly is the foreign exchange risk reserve for forward foreign exchange sales? And how will this policy affect exchange rates, investors' wallets, and import/export companies?

The soaring RMB exchange rate

To understand this policy, we must first start by discussing why the central bank intervened.

Since the RMB exchange rate broke 7 against the US dollar last December, it has entered an "accelerated growth mode." In just three trading days after the Spring Festival holiday, it appreciated by more than 800 points, especially on February 26, 2026, when the annual increase once exceeded 2% during trading.

The reasons for the appreciation of the RMB are not complicated.

First, there are external factors, with the continued weakening of the US dollar being the core driving force.

With the Federal Reserve initiating an interest rate cut cycle, the market generally expects the dollar to continue to depreciate. Coupled with other factors, this has led to a sustained weakening of the dollar index, which has fallen from 100 last year to 95.5 in January of this year.

Secondly, there are internal factors. The resilience of the Chinese economy has laid the foundation for the strengthening of the RMB. Upgrading of the export structure, enhanced competitiveness of the manufacturing sector, and a high current account surplus provide solid fundamental support for the RMB. Data shows that China's trade surplus of US$1.19 trillion in 2025 means that a large number of export companies hold a huge amount of US dollar foreign exchange.

When these companies took advantage of the Spring Festival to "settle foreign exchange"—selling US dollars and buying RMB—it drove the RMB to appreciate further.

The combination of internal and external factors creates the so-called "procyclical effect": the depreciation of the US dollar leads to more foreign exchange settlement, which in turn promotes further appreciation, forming a positive feedback loop.

Wang Qing, chief macro analyst at Golden Credit Rating, believes that the recent surge in the offshore RMB, leading the market sentiment, has further boosted the RMB's upward trend.

However, the central bank's exchange rate control objective is to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level by taking market supply and demand as the basis, strengthening expectation guidance, preventing the risk of exchange rate overshooting, and strengthening market expectation guidance.

If the RMB exchange rate experiences a sharp rise or fall that deviates from fundamentals, regulatory authorities will decisively intervene with foreign exchange stabilization tools to send clear policy signals and prevent the RMB from appreciating too quickly.

For some, the increased value of the RMB is a good thing, but for export companies, the situation is quite the opposite.

In 2025, China's net exports will contribute 32.7% to economic growth. If the RMB appreciates too quickly or too much, the impact on export enterprises will gradually become apparent.

According to media reports, a survey of several export-oriented listed companies revealed that the appreciation of the RMB exchange rate has had a significant impact on their business.

Taking a listed company in the smart mobility sector as an example, the company's foreign exchange impact amounted to 130 million yuan in the fourth quarter of 2025. Although the company had adopted hedging tools for risk management and achieved a hedging income of 53 million yuan, it still lost 70-80 million yuan in net profit.

Guan Tao, chief global economist at BOC Securities, stated that if domestic companies receive payments in US dollars for exports, they will suffer exchange rate losses due to the appreciation of the RMB. The nominal bilateral exchange rate appreciation of the RMB will evolve into a real effective exchange rate appreciation, which will affect the export competitiveness of enterprises.

Against this backdrop, the central bank pulled out its toolbox and introduced the "foreign exchange risk reserve for forward foreign exchange sales".

The central bank pulled out its toolbox

To understand this tool, we need to clarify four key concepts: foreign exchange settlement, foreign exchange sales, forward foreign exchange sales, and foreign exchange risk reserves.

Foreign exchange settlement refers to enterprises and individuals selling their foreign exchange to banks in exchange for RMB, while foreign exchange sales refer to enterprises and individuals using RMB to buy foreign exchange from banks.

Forward exchange transactions are a type of exchange rate hedging derivative product offered by banks to businesses. Generally, to mitigate exchange rate fluctuations, exporting companies tend to lock in exchange rates in advance through forward exchange contracts, options, and other tools. The companies do not immediately purchase foreign exchange, but the banks conducting this transaction need to buy foreign exchange in the spot market, thus affecting the spot exchange rate.

As for the foreign exchange risk reserve, it dates back to the "August 11th exchange rate reform" in 2015.

To address the significant fluctuations in the RMB exchange rate at the time, the central bank introduced a series of innovative policy tools, one of the most important being the "foreign exchange risk reserve." This stipulated that banks must deposit a certain percentage of their foreign exchange transactions with the central bank as margin.

Bank staff count US dollars

So how does this tool from the central bank "cool down" the RMB exchange rate? This involves a complex transmission chain.

First, according to the central bank's foreign exchange risk reserve regulations, banks must deposit a portion of their funds with the central bank for every forward foreign exchange transaction. Since this fund does not generate interest, this means that banks bear a high cost when conducting forward foreign exchange transactions.

Now that the central bank has lowered the reserve requirement ratio for forward foreign exchange sales, banks no longer need to freeze interest-free foreign exchange funds, and the cost of forward foreign exchange sales has decreased significantly.

With the decline in banking costs, companies can purchase foreign exchange forward at a lower price, which will increase the incentive for import companies with demand to purchase foreign exchange forward in advance.

As a result, more and more companies and banks are signing forward exchange contracts. In order to hedge risks, banks will immediately buy US dollars in the spot market. At this time, the demand for US dollars in the market increases. Since the exchange rate between the US dollar and the RMB is a seesaw, the increase in the demand for US dollars will cool down the appreciation of RMB.

The central bank has used similar methods more than once.

For example, on October 10, 2020, the People's Bank of China issued an announcement stating that it would lower the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0%. At that time, the central bank's operation was intended to slow down the pace of RMB appreciation. The current policy change is almost a repeat of what happened 6 years ago.

Liu Tao, a senior researcher at Guangkai's Chief Research Institute, believes that lowering the foreign exchange risk reserve ratio for forward foreign exchange sales is a shift from emergency regulation to normalized management, allowing market mechanisms to play a more effective role, guiding all parties to view exchange rate fluctuations rationally, reducing pro-cyclical "herding effects," and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.

Wen Bin, chief economist at China Minsheng Bank, said that with no further pressure on the exchange rate to depreciate, counter-cyclical adjustment tools should be phased out to allow policies to return to neutrality and reduce direct intervention in the market.

What impact will the policy have after it is implemented?

The central bank's policy adjustment is a real benefit for businesses.

Liu Tao stated, "Previously, the 20% foreign exchange risk reserve for forward foreign exchange sales was paid by banks. However, in actual business operations, some banks may transfer this hidden cost to enterprises by adjusting forward quotes and widening spreads."

For example, suppose a bank wants to conduct a forward foreign exchange sale of US$1 million. When the reserve ratio is 20%, it needs to set aside US$200,000 in foreign exchange risk reserves. This fund will be deposited with the People's Bank of China for one year at zero interest.

In this situation, this interest will be treated as a cost and ultimately borne by the customers who have signed forward contracts with the bank, thus reducing their incentive to purchase foreign exchange forward. However, once the reserve requirement ratio is reduced to 0, companies with actual trade needs will be able to purchase foreign exchange at a lower cost.

For some small and medium-sized enterprises, the cost of using forward foreign exchange contracts to lock in exchange rates is not low. This has led some companies that should be able to avoid exchange rate risks to give up using this tool because of "cost issues".

Now, with the reserve requirement ratio lowered to 0%, the central bank is encouraging more small and medium-sized enterprises to hedge exchange rate risks and stabilize production expectations through forward foreign exchange sales, thus better serving the foreign exchange needs of the real economy. For import companies with already thin profit margins, this is equivalent to directly increasing their profits.

It is worth mentioning that in 2025, the trading volume of China's foreign exchange market reached US$42.6 trillion, and the foreign exchange hedging ratio of enterprises rose to 30%, both of which are record highs.

This data indicates that Chinese companies are becoming more aware of exchange rate risk management, and hedging has become a standard practice for an increasing number of companies. This policy adjustment is expected to further increase this proportion.

State Administration of Foreign Exchange Building

How should investors cope with RMB volatility?

For investors focused on foreign exchange investment, fluctuations in the RMB can affect asset allocation such as USD assets and HKD wealth management products.

According to various institutions and experts, currency exchange should be based on individual needs, and one-sided betting is not advisable. In other words, individual investors need to manage exchange rate risk based on actual needs, rather than using exchange rates as a speculative tool.

Li Nan, associate professor at the School of Finance, Shanghai Jiao Tong University, pointed out that the current interest rate difference between US dollar deposits and RMB deposits is about 2%. This interest rate difference will disappear if the US dollar depreciates by 2% against the RMB. If the US dollar depreciates by more than 2%, it is better to deposit RMB directly.

For investors who already hold US dollar assets, experts also suggest that they consider dividing their US dollar holdings into several transactions and gradually closing them off at different exchange rate points to reduce the risk of missing out or chasing high prices.

For individual investors who have genuine foreign exchange needs for purposes such as studying abroad, traveling, shopping overseas, or paying bills overseas, they can retain a corresponding amount of US dollars; those who do not have actual needs and hold US dollars simply for interest rate differentials can appropriately reduce their US dollar positions during periods of RMB strength.

Foreign currency exchange

Conclusion

Overall, the central bank's reduction of the reserve requirement ratio for forward foreign exchange sales is essentially a return to a "neutral" policy stance. This is because the central bank has adjusted the foreign exchange risk reserve requirement ratio five times between 2015 and 2025.

From the significant fluctuations following the "8.11 exchange rate reform" to the current situation where the RMB exchange rate has become more flexible and two-way fluctuations have become the norm, the central bank has repeatedly demonstrated through its actions that it can guide the exchange rate trend and prevent exchange rate risks at critical moments.

In the face of a turbulent external environment, both individual investors and businesses need to learn to coexist with exchange rate fluctuations.

As the central bank has repeatedly emphasized: adhere to the principle of exchange rate risk neutrality and do a good job in exchange rate risk management. This is not just empty talk, but a compulsory course for every market participant.