SHANGHAISINGAPORE, Sept 1 Reuters China39;s central bank said on Friday it will cut the amount of foreign exchange that financial institutions must hold as reserves for the first time this year, a move seen aimed at slowing the pace of recent yuan declines.

The People39;s Bank of China PBOC said it would cut the foreign exchange reserve requirement ratio RRR by 200 basis points bps to 4 from 6 beginning Sept. 15, according to an online statement.

That would effectively free up 16.4 billion worth of foreign exchange with China39;s FX deposits standing at 821.8 billion at endJuly.

The yuan bounced in both onshore and offshore trade to threeweek highs after the news. The onshore yuan surged to a high of 7.2360 per dollar in the early Asian session, the strongest level since Aug. 11, before last fetching 7.2542 as of 0220 GMT.

The PBOC said its move was to improve financial institutions39; ability to use foreign exchange funds.

The FX RRR cut should also lower dollar funding costs in the interbank market and alleviate the downward pressure on the yuan, traders and analysts said.

But they added that the move was unlikely to reverse the downward trend of the yuan, seeing it as more of signal to markets that it was planning to lean harder against rapid yuan losses if needed.

The yuan is one of the worstperforming Asian currencies this year, down about 5 against the dollar amid a sharp slowdown in China39;s economy and widening yield differentials with the United States….