China tries to salvage the yuan, by making it costlier to short the currency.
The People’s Bank of China (PBOC) announced on Friday that it will impose reserve requirements of 20% on some foreign-exchange forward contracts’ trading - a tactic expected to arrest yuan shorting tendencies among traders and therefore stabilize the currency.
Although a nation’s weak currency is a potential tailwind to its exports, too much depreciation in the currency might cause capital outflows. PBOC steps in after yuan’s continued losses led to its nearing the 7 per dollar mark. The central bank, however, has indicated that the strategy is for limiting currency volatility amid trade tensions - versus creating capital controls.
Earlier, China had introduced a similar tactic after the 2015 devaluation of the yuan, and had removed it in September 2017.