For companies that have reached the upper limit of overseas financing, a relaxation may be welcome, but the move’s effectiveness remains unclear as rate spread with US dollar widens.

China’s central bank has mounted a stronger defence for the yuan and the domestic foreign exchange market, as the country braces for the return of Donald Trump who is expected to bring greater headwinds to trade and the exchange rate.

The People’s Bank of China and the State Administration of Foreign Exchange announced jointly on Monday an increase in the macroprudential adjustment parameter for the cross-border financing of enterprises and financial institutions, from 1.5 to 1.75 – a move previously taken to prevent the yuan-dollar exchange rate from worsening.

Cross-border financing involves providing funding for business activities that occur outside a country’s borders, and the adjustment parameter determines the upper limit of such financing allowed.

Experts said the move, which comes ahead of Trump’s inauguration next week, means businesses can borrow more foreign debt, and the action is among the precautions Beijing is taking as the onshore and offshore yuan has depreciated quickly against the US dollar.
“This move can go some way in easing the pressure of depreciation and increasing the amount of overseas financing for enterprises. If more US dollars flow in as a result, it will certainly help stabilise the yuan,” said Zhu Tian, an economics professor with the China Europe International Business School in Shanghai.

But Zhu said the boosting effect can be limited.

Why should companies borrow more expensive US dollars?
Zhu Tian, China Europe International Business School
“The question is how helpful it will be when the interest rate for US dollar financing is higher amid a widening rate spread,” Zhu noted. “Why should companies borrow more expensive US dollars?

“But for some companies that have reached the current upper limit of overseas financing, a relaxation is welcome, and it is suitable under the current circumstances.”

The yuan is dropping to lows unseen in several years against the US dollar, as falling interest rates at home and looming tariffs from the US are pulling the currency downward. The offshore yuan further weakened on Friday, rising above 7.3 to the dollar (a higher number signs relative weakness).

And further devaluation pressure is building as a new trade war with Washington appears on the cards.
However, in recent weeks, the PBOC has emphasised its resolve in stabilising the currency.

We have the confidence, conditions and ability to maintain a stable foreign exchange market
Pan Gongsheng, PBOC governor
On Monday, PBOC governor Pan Gongsheng said at the Asian Financial Forum in Hong Kong that policymakers would resolutely correct procyclical behaviour and other disruptive moves to mitigate the risk of the yuan exchange rate “overshooting”.

“We have the confidence, conditions and ability to maintain a stable foreign exchange market,” he said.

Pan also stressed an adherence to the market’s role in deciding exchange rates.

A recent meeting held by the central bank and foreign exchange regulator also discussed the situation and the need for “self-discipline” while calling for confidence and preparedness. “The yuan’s stability must be maintained with measures to stabilise expectations and correct procyclical behaviours,” noted a readout of the meeting on the PBOC’s website.

It also said market participants are better at coping with external shocks, and that the fundamentals of China’s economy, the overall balance of international payments, and resilience will underpin the yuan’s stability.

The PBOC also announced a plan last week to issue a record 60 billion yuan (US$8.18 billion) worth of central bank bills in Hong Kong to increase the supply of high-grade yuan bonds in the offshore market.