Nomura: Foreign currency deposit reserve requirement rises to 6% as central bank seeks to slow renminbi appreciation

Why is the central bank adjusting the foreign currency deposit reserve requirement again?

The central bank announced that it will raise the foreign currency deposit reserve requirement from 4% to 6% effective 15 November 2026. Nomura believes the measure is intended to slow the pace of renminbi appreciation against the dollar.
The renminbi appreciated 0.75% against the dollar in October, its largest monthly gain in five months; as of October, the onshore renminbi had appreciated 5.0% against the dollar during the year, following a gain of 4.4% in the whole of the previous year.
Nomura believes the central bank’s recent warning about “herd behaviour” in the foreign exchange market, together with this reserve requirement increase, indicates that policymakers are concerned that excessively rapid appreciation could weigh on exports. The bank noted that exports are currently the largest single driver of growth amid visibly weak domestic demand.

After the foreign currency deposit reserve requirement rises, banks must deposit more foreign currency assets with the central bank and can meet the requirement by increasing foreign currency funding or reducing foreign currency lending. This tightens onshore foreign currency liquidity and may slow the extension of foreign currency credit.
Based on an outstanding foreign currency deposit balance of approximately 1.2 trillion dollars at the end of September, Nomura estimates that the two-percentage-point increase could absorb approximately 24 billion dollars of long-term foreign currency liquidity from the onshore banking system. The bank believes higher onshore foreign currency interest rates will also make holding foreign currency more attractive.
This tool has previously been used in the opposite direction: in September 2023, when the renminbi faced substantial depreciation pressure against the dollar, the central bank cut the foreign currency deposit reserve requirement from 6% to 4%.

Nomura believes the widening of China’s trade surplus is more closely related to a decline in the real effective exchange rate than to the nominal exchange rate alone. In addition to exchange rate movements, the real effective exchange rate reflects China’s price level relative to its trading partners and is therefore related to export price competitiveness.
As of September 2026, the renminbi’s real effective exchange rate had rebounded 2.8% during the year but remained 14.4% below its March 2022 peak; over the same year-to-date period, the nominal effective exchange rate rose 5.3%. Nomura believes persistent downward pressure on domestic prices offset a substantial part of the impact of this year’s nominal appreciation.
The bank therefore concludes that, unless domestic price levels recover, gradual nominal appreciation is unlikely to substantially narrow the trade surplus; a better response would be to end deflation and boost domestic demand.