In a significant move aimed at stabilizing its currency, the People's Bank of China (PBOC) made headlines on January 9, 2025, when it announced the issuance of 600 billion yuan in central bank bills in Hong KongThis decision, coupled with recent regulatory measures, underscores the government's commitment to maintaining a stable exchange rate amidst fluctuating market conditions.
On January 13, the PBOC further revealed adjustments to its macro-prudential management of cross-border financing, raising the regulatory parameter from 1.5 to 1.75. This change will apply to enterprises and financial institutions, with the intention of expanding their potential sources of cross-border fundingThe adjustment reflects a proactive approach to optimize asset-liability structures and enhance financial stability.
The macro-prudential adjustment parameter is essentially a regulatory tool that governs the extent to which companies and financial bodies can embark on cross-border financing initiatives
By modifying this parameter, the PBOC can directly influence the scale of cross-border financing and the associated risk-weighted balance limitsThis particular adjustment is crucial for companies seeking financial resources from international markets.
Dong Ximiao, Chief Researcher at Zhangle Financial Research Institute and Deputy Director of the Shanghai Financial and Development Laboratory, expressed that the updated parameter will expand domestic institutions' room for securing funds from overseas, particularly from banks situated beyond China's bordersThis is particularly pivotal as increased access to foreign financing sources can serve to enhance liquidity on the domestic front, particularly in foreign currencies like the U.Sdollar.
He emphasized that by enlarging the space for offshore financing, the move is expected to increase the influx of cross-border capital, thereby facilitating a healthier balance of supply and demand in the foreign exchange market
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Such an influx is critical in ensuring stability despite the volatile nature often seen in currency exchanges, particularly given the recent fluctuations in the yuan's value.
Additionally, a prominent researcher at the National Financial and Development Laboratory, Pang Ming, indicated that this recent adjustment, along with the PBOC's increased offshore issuance of central bank bills, represents a coordinated strategy to safeguard the stability of the renminbiTogether, these measures form a protective framework against the inherent risks associated with excessive fluctuations in exchange rates.
Historically, the PBOC and the State Administration of Foreign Exchange have periodically modified the cross-border financing parameters in response to the external economic environmentFor instance, in January 2021, amid concerns over the rapid appreciation of the yuan, the parameter was reduced from 1.25 to 1, while increases were documented in late 2022 and mid-2023 to address the depreciation of the yuan during those periods.
Presently, the raised parameter occurs against a backdrop of increased volatility in the yuan, which recently fell below the significant 7.3 mark against the dollar
This adjustment showcases the PBOC's readiness to leverage its policy tools to guide market expectations and stabilize the currency's performance amidst external pressures.
Recent observations from macroeconomic analysts suggest a growing tendency for the PBOC to employ various tools to ensure exchange rate stabilityNotably, Wang Qing, Chief Macro Analyst at Dongfang Jincheng, commented on the PBOC's reinforced commitment to countering market disruptions and preventing one-sided expectations that may lead to self-fulfilling prophecies regarding the currency's valuation.
He noted that recent reports indicated that the onshore yuan depreciated against the dollar, closing at 7.3093, marking the first instance since September 2023 where the rate dipped below the 7.3 thresholdConcurrently, offshore yuan values faced similar downward pressures, with the exchange rate reaching a low of 7.3627.
Concerns surrounding the inauguration of a new U.S
administration, along with rising fears over potential tariffs on the EU, have compounded the challenges faced by the yuanMarket expectations regarding future Federal Reserve interest rate cuts also intensified, contributing to the volatility of the dollar index—an important determinant of the yuan’s performance.
Wang pointed out that should extreme fluctuations in the yuan's value—detached from economic fundamentals—occur in the future, regulatory bodies are likely to swiftly deploy stability tools to alleviate potential shocks to the market.
Proposed measures include refining the central parity of onshore yuan, moderate adjustments to liquidity in offshore markets, and the aforementioned changes to the macro-prudential parameter for cross-border financingAdditionally, there are suggestions for further tools like reducing the macro-prudential adjustment coefficient for outbound lending by domestic enterprises, easing the forex reserve requirement ratios, and altering interest rates on dollar deposits to manage demand for foreign currency.
Historically, such measures have proven effective in shaping market expectations and mitigating the risks associated with sudden currency fluctuations