Market Impact of Cancelling Forward Foreign Exchange Risk Reserve Ratio

Morning FX

After the Chinese New Year, the RMB exchange rate has experienced a continuous and rapid appreciation. In response to rising expectations of one-sided RMB appreciation, the central bank announced last Friday morning that, starting from March 2, 2026, the foreign exchange risk reserve ratio for forward FX sales will be reduced from 20% to 0.

I. Market Reaction

After the announcement, USDCNH immediately rebounded 200 pips from the 6.84 level to 6.86. When the onshore market opened, under selling pressure at higher levels, it consolidated around 6.85. However, later in the evening, affected by tensions in the Middle East and increased risk aversion sentiment, USDCNH surged above 6.87. On the swaps side, the market expects an increase in forward FX buying, and combined with the decline in SOFR, 1Y USDCNY swap points rose by 30 pips to -1255. Regarding option volatility, as the market's expectation of rapid one-sided RMB appreciation was broken, implied volatility in options declined.

1. Macroeconomic cycle differences. 2017 was during a US dollar rate hike cycle, while both 2020 and the current period are in a US dollar rate cut cycle.
2. Supply, demand, and sentiment. In 2017, market confidence in RMB was still fragile, and appreciation was mainly due to passive appreciation driven by a weaker US dollar index; in 2020, after the pandemic, China was the first to resume work and production, and companies held large amounts of accumulated US dollars; this year, the situation is similar, as companies are holding a large amount of US dollars to be settled, as reflected in the massive net FX settlement surplus in the past two months.
3. Differences: Cost impact differences. In the past, US dollar interest rates were low, so the risk reserve had little impact on the cost of purchasing FX. Now, although the Federal Reserve has entered a rate cut cycle, based on the current one-year USD FTP cost of around 3.5% for banks, this translates to about 480 pips for forward USDCNY purchases (3.5%*20%*6.85). Removing the reserve requirement will significantly lower the forward hedging costs for importing companies and help to promote a balance between supply and demand in the FX market.

III. Outlook on Subsequent Market Trends

1. Spot:Historically, the removal of the risk reserve generally means that RMB depreciation expectations have faded. In the medium to long term, policy is unlikely to reverse the appreciation trend of the RMB, but in the short term, with the added risk aversion sentiment due to the Middle East situation, USDCNY may fluctuate and consolidate in the short term; if there is an opportunity for it to reach above 6.90, it would be an excellent opportunity for FX settlement.

2. Swaps: One of the main reasons for the pressure on swap points this year is the excessive volume of forward FX settlement. Releasing forward FX purchases will make market supply and demand more balanced, driving swap points higher.

3. Option volatility: Previously, clients needed to pay half the risk reserve for both buying calls and selling puts domestically. This client demand caused USDCNY RR to be relatively low; after the cancellation, it is expected that USDCNY RR will tend to rise.

For clients seeking to hedge, this adjustment is highly beneficial for all types of hedging clients: it not only reduces the forward FX purchase cost for buyers, but also allows FX settlement clients to employ more flexible option strategies domestically (such as USD/CNY put spread or seagull options for settlement), enriching the corporate toolbox for exchange rate risk management.