In a one-two punch aimed at stabilizing the renminbi, the People's Bank of China and the State Administration of Foreign Exchange have today raised the parameters for cross-border financing macroprudential regulation. This action has sparked a sharp rise in the value of the renminbi.
On July 20, the offshore renminbi against the U.S. dollar climbed more than 500 points in a short span, now reported at 7.1825.
The People's Bank of China and the State Administration of Foreign Exchange announced today that in order to further improve the comprehensive cross-border financing macro-prudential management, they would continue to increase the cross-border fund sources of enterprises and financial institutions. By guiding them to optimize their asset-liability structures, the macro-prudential regulation parameters for cross-border financing of enterprises and financial institutions were adjusted from 1.25 to 1.5, implemented from July 20, 2023.
The renminbi against the U.S. dollar opened at 7.1466, 20 points higher than the previous day, and significantly stronger than the market prediction by 680 points. The previous day's closing price was at 7.2197, and the night market closed at 7.2240.
The adjustment of macro-prudential regulation parameters for corporate cross-border financing mainly affects the cross-border financing behaviors of domestic enterprises. Typically, lowering these parameters means shrinking the space for cross-border financing exposure of domestic enterprises, thus reducing cross-border fund inflows and overall foreign debt scale. Conversely, raising these parameters aims to expand capital inflows, including further expanding foreign debt space borrowed by domestic institutions, as one of the macro-prudential management measures for cross-border fund flows.
Wen Bin, Chief Economist of China Minsheng Bank, previously stated that according to relevant policy provisions, the upper limit of the risk-weighted balance of cross-border financing can be raised with the adjustment of the macro-prudential regulation parameters. This, in turn, encourages market entities to engage in cross-border financing.
Public data from the People's Bank of China shows that in 2016, the People's Bank of China and the State Administration of Foreign Exchange established a comprehensive macro-prudential management framework for cross-border financing. This eliminated the prior approval of foreign debt, facilitating cross-border financing by domestic institutions. This policy established a macro-prudential restraint mechanism for cross-border financing based on micro-subject capital or net assets, and implemented integrated management of domestic and foreign currency cross-border financing.
Initially, this management framework was piloted on a small scale, then expanded to all financial institutions and enterprises across the country. The macro-prudential regulation parameter was set at 1, with several adjustments made primarily between 2020 and 2022.
In October 2022, the People's Bank of China and the State Administration of Foreign Exchange raised the macro-prudential regulation parameter to 1.25.
Wang Qing, Chief Macro Analyst at Dongfang Jincheng, suggested to People's Network Finance that increasing the macro-prudential regulation parameter for cross-border financing of enterprises and financial institutions is conducive to increasing domestic dollar liquidity. This alleviates depreciation pressure on the renminbi in the current foreign exchange market, further stabilizes exchange rates, and bolsters market confidence. It also helps avoid excessive concentration of renminbi depreciation expectations in the short term.
