China's central bank announced a hike in its foreign exchange risk reserve ratio from zero to 20 percent effective Wednesday, amid recent depreciation of the Chinese yuan against the U.S. dollar.

The People's Bank of China (PBOC) said the move is being done to stabilize forex-market expectations and strengthen prudential macro-economic management.

The increase in the forex risk reserve ratio will increase the cost of forward forex trading against yuan, thus helping balance supply and demand in the forex market, Wen Bin, chief economist at China Minsheng Bank, wrote in an opinion piece on Finance Sina.

First introduced in 2015, the forex risk reserve has served as a tool that aims to tame violent fluctuations in the forex market and prevent cross-border forex arbitrage.

To slow the yuan's appreciation, the PBOC last changed the ratio in October 2020, lowering it from 20 percent to zero at the time.

A hawkish Federal Reserve has been an attributed reason for the continued rally of the U.S. dollar since the beginning of the year, causing other global currencies to depreciate, at varying degrees.

The U.S. dollar index has hovered near a two-decade high this month as the Chinese yuan slipped past a key 7-per-dollar mark to a two-year low, while the euro fell to a 20-year low and the Japanese yen languished near 24-year lows.

Read more: China's central bank to cut forex reserve requirements