SHANGHAI (Reuters) – China stepped up its policy measures on Monday to fend off a weakening yuan by easing rules to allow more foreign borrowing and sending verbal warnings as the Chinese currency hovered around 16-month lows against a strong dollar.
The yuan has faced renewed depreciation pressures, weighed down by the triple whammy of a generally stronger US dollar, falling Chinese yields and rising trade tensions with other economies.
The People’s Bank of China (PBOC) announced on Monday that borrowing limits will be increased to allow companies to borrow more abroad.
Its macroprudential assessments (MPA) ratio – which determines the maximum a company can borrow against its net assets – would be raised to 1.75 from 1.5, with immediate effect.
The move was to “further improve the macroprudential management of cross-border financing, continue to increase sources of cross-border funds for companies and financial institutions and guide them to optimize their assets and liabilities,” the PBOC said in a statement issued jointly with the foreign exchange regulator.
Separately, China’s Foreign Exchange Board planned to resolutely keep the yuan exchange rate basically stable at reasonable and balanced levels, the central bank said in another statement.
The committee is a forum under the auspices of the central bank and the foreign exchange regulator.
The committee also said the monetary authorities will increase the resilience of the foreign exchange market and strengthen market governance. It will also correct pro-cyclical market activities, deal with behavior that disrupts market order and prevent exchange rate overshooting risks.
And in Hong Kong, PBOC Governor Pan Gongsheng told the Asian Financial Forum the same day that “China has the confidence, conditions and ability to maintain the stable operation of the foreign exchange market.”
China will keep the yuan exchange rate basically stable at reasonable and balanced levels,” Pan reiterated.
These measures “send a signal to stabilize the yuan,” said Ken Cheung, chief Asian FX strategist at the Mizuho (NYSE:) Bank.
“But the actual impact on capital flows and the exchange rate is relatively limited due to the low cost of domestic financing.”
Cheung said regulators will continue to mainly use daily mid-fixing to stabilize the currency and guide market expectations.
China was trading at 7.3315 per dollar as of 0247 GMT on Monday, not far from the 16-month low of 7.3328 hit on Friday. It has lost more than 3% against the dollar since US President-elect Donald Trump won the election in November.
The central bank has been setting its official intermediate guidance on the firmer side of the key 7.2 level since mid-November and stronger than market projections. This is widely interpreted by traders and analysts as a sign of growing uneasiness about the yuan’s recent declines.
The PBOC said last week it would sell 60 billion yuan worth of six-month yuan bills in Hong Kong on Jan. 15, the most since the central bank began selling such bills in the financial center in 2018.
Selling these yuan notes will pick up liquidity in the market to reduce speculative bets against the yuan.
