China's policy makers are pushing back against a surge in theyuan by lifting rules that made betting against the currencyexpensive.

Effective Monday, financial institutions will no longer need toset aside cash when buying foreign exchange for clients throughcurrency forwards, the official Financial News reported, citing aPeople's Bank of China notice. Previously, banks had to hold 20% ofsales at zero interest for a year, a rule imposed in October 2015as the authorities struggled to contain the fallout from the yuan'sdevaluation. The central bank has also removed a reserverequirement on yuan deposited onshore by overseas financialinstitutions, the newspaper reported.

The news drove the currency lower, with the yuan falling 0.54%to 6.5240 per dollar as of 6:09 p.m. in Shanghai, and down 0.5% inHong Kong. The PBOC emailed a statement that cited the head of itsfinancial research institute as confirming the easing of the rules,although it didn't specify the timing.

It's necessary to be more neutral on foreign-exchange policybecause the yuan is at a reasonable level, the market is morerational and cross-border flows are more balanced, Sun Guofeng wascited as saying in the emailed statement. The currency market willbetter serve the real economy as a result, he added.

“This is a clear positive step of stepping back on capitalcontrols,” said Eddie Cheung, a strategist at Standard Chartered inHong Kong. “It can be argued that the recent yuan appreciation wastoo fast. The yuan may be a bit more range-bound in the near termthan one-way as markets digest the impact of the move.”

The lifting of the restrictions is a signal that the governmentis growing uncomfortable with the pace of gains in the yuan, whichhas jumped more than 2% in the last two weeks. The move may also bea prelude to allowing greater two-way flexibility in a currencystill strongly influenced by state directives, capital controls anda daily fixing rate.

The rolling back of measures also shows how far sentiment hasshifted in the currency, which started 2017 under severe pressureafter its worst annual loss in more than two decades. Since then, aslumping dollar, abating outflows, a change to the fixing mechanismand bets the government wants a strong yuan before next month'sCommunist Party congress helped send buying momentum in thecurrency to the highest level in 12 years.

The amount of foreign exchange China banks sold to clients withforwards shrank to 51.2 billion yuan ($7.9 billion) in July from apeak of 497.4 billion yuan in August 2015, according to datareleased by the State Administration of Foreign Exchange.

While the step suggests policy makers have become more confidentabout the yuan's outlook, it also shows how they continue to pulllevers to guide the nation's financial markets.

“As for the near-term CNY outlook, while assessing marketpressures helps, interpreting policy intention is probably evenmore important,” MK Tang, an analyst at Goldman Sachs, wrote in areport.

Separately, the PBOC has been reducing its short foreigncurrency forward positions this year. A total of $5.4 billion — or90% of outstanding positions — will mature this month. The currentpile of $6 billion as of July is down from a peak of $45.3 billionin January.

“The fact that the PBOC didn't roll over its forward positionsshows the central bank's confidence in yuan strength,” said IrisPang, Hong Kong-based economist at ING Bank. “After the currency'sgains so far this year, the PBOC no longer needs to keep theseforward positions.”

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