China Increases Cross-Border Financing Parameters to Stabilize Exchange Rate
July 20, 2023 – In a move aimed at stabilizing the exchange rate and encouraging cross-border financing, the People’s Bank of China and the State Administration of Foreign Exchange announced an increase in the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions.
This adjustment comes after a nine-month hiatus and signifies the regulators’ intent to release the foreign debt financing potential of domestic enterprises and financial institutions. By expanding cross-border funds and optimizing asset-liability structures, this measure aims to balance the country’s balance of payments and stabilize the exchange rate.
With the parameters raised from 1.25 to 1.5, domestic enterprises and financial institutions can now access increased cross-border financing quotas. Analysts believe that this move, accompanied by a strong and stable exchange rate, will relieve pressure on the depreciation of the RMB.
According to Wang Qing, chief macro analyst of Oriental Jincheng, the higher the macro-prudential adjustment parameters for cross-border financing, the higher the upper limit of cross-border financing for enterprises and financial institutions. Wen Bin, Chief Economist of Minsheng Bank, adds that this increase will facilitate domestic enterprises and financial institutions in increasing their cross-border financing quotas, thereby optimizing their asset-liability structures.
The recent fluctuation of the RMB exchange rate played a significant role in the decision to increase the macro-prudential adjustment parameters. As the pressure on RMB depreciation increased, policymakers utilized this tool to stabilize the foreign exchange market and guide market expectations within a reasonable and balanced range.
The Monetary Policy Committee of the People’s Bank of China has been focused on maintaining the basic stability of the RMB exchange rate. With the recent adjustments, regulators aim to alleviate the external pressure on RMB depreciation. Wu Dan, a researcher at the Bank of China Research Institute, explains that the increase in parameters and the expansion of foreign debt quotas will increase the liquidity of the US dollar in the domestic market, thus easing the recent depreciation of the RMB exchange rate.
Looking ahead, market participants expect the RMB exchange rate to rebound significantly in the short term. The introduction of regulatory policies, coupled with restored market expectations, is predicted to have a corrective effect on the exchange rate. The subsequent trend will depend on the pace and strength of policies to stabilize growth and the macroeconomic outlook for the third quarter.
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