Late last week the People's Bank of China cut the reserve requirement on yuan FX forwards

(Earlier post: The PBOC will effectively remove a reserve requirement for trading FX forwards today)

Goldman Sachs have posted their take on the implications (bolding mine):

  • The authorities have become a bit less concerned about outflow pressures. Therefore, the RR relaxation could be a precursor for incremental unwinding of other capital control measures, should the flow situation remain benign.
  • A meaningful possible step preparing for increased (two-way) volatility in the CNY in the medium term. Besides reflecting higher policy tolerance for outflows, the RR relaxation has the clear effect of lowering the cost for importers to hedge their FX liability exposures. Such hedging would in turn mitigate a main negative side-effect of having a more flexible FX regime, which has long been one of the authorities' structural policy objectives.
  • As for the near-term CNY outlook, while assessing market pressures helps, interpreting policy intention is probably even more important. For instance, reserve data suggests the PBOC bought about $10bn in FX in August, only a moderate amount by China's historical standards; it could conceivably have bought materially more to limit the CNY appreciation. The fact that it didn't seems to indicate that the authorities were comfortable with, or even desired, the strong CNY in August.
  • There could be "too much of a good thing" more recently, though. We maintain our view that risk of major depreciation is limited in the run-up to the Party Congress (to start on October 18). That said, we believe it is useful to continue tracking policy signals for the near-term CNY intention, including the countercyclical factor. Just when bullish changes in the countercyclical factor (i.e., $/CNY fixing below CFETS model-implied) preceded policy efforts to push the currency stronger in May-July, a bearish change in this factor currently could signal a decreased policy comfort with the continued CNY appreciation. On this score, we note that the countercyclical factor in the last few days has turned more reactive to the market appreciation pressures ... potentially pointing to lower propensity to accommodate much further CNY strength.