As the yuan sizzles, China’s central bank deploys double-barrelled policy tweak
Regulators refine cross-border rules and cut the foreign exchange risk reserve ratio for forward forex sales to zero, aiming to provide stable offshore liquidity and help firms manage risks
With China’s currency having steadily strengthened in recent months, the central bank has rolled out a pair of measures to lower foreign exchange hedging costs and support cross-border yuan financing.
In a notice on Thursday, the People’s Bank of China refined the framework for domestic banks to conduct cross-border yuan interbank financing, explicitly endorsing their role in providing stable yuan liquidity to offshore markets through regulated channels.
The move comes as Beijing has been seeking to enhance China’s offshore yuan market and further internationalise the currency.
According to the PBOC, the changes tie the upper limit on net outbound yuan lending to banks’ capital strength and set adjustable parameters for countercyclical adjustments. These reforms, the bank said, “markedly enhance the rule-based nature and transparency” of the management of such businesses.
The adjustments will also help “ensure a smoother and more stable liquidity supply in the offshore yuan market”, the PBOC added.
Separately, the central bank announced on Friday that it would cut the foreign exchange risk reserve ratio for forward forex sales from 20 per cent to zero, effective on Monday. The goal, it said, is to “promote the development of the foreign exchange market and better support enterprises in managing exchange rate risks”.
The move means lower costs for banks to provide forward US dollar sales, making it cheaper for enterprises to hedge. This, in turn, could ease immediate demand for yuan and potentially lead to a weakening of the currency.