Higher limit for overseas debt to stabilize yuan

Experts say more financing of FIs, corporates can expand capital inflows

The latest policy adjustment that allows Chinese companies to borrow more from overseas will help boost confidence in the renminbi, reassuring the market that the country's central bank is determined to safeguard stability in the foreign exchange market, experts said on Tuesday.

The People's Bank of China, the country's central bank, and the State Administration of Foreign Exchange said on Tuesday they have decided to raise the macro-prudential adjustment parameter for cross-border financing of corporates and financial institutions to 1.25 from 1.

The move will expand the cross-border funding sources of enterprises and financial institutions and encourage them to optimize their asset-liability structure, the PBOC said in a statement.

Experts said the parameter acts as a multiplier that determines the upper limit of outstanding cross-border financing an institution can have. Raising the parameter would mean domestic enterprises and financial institutions can access more foreign debt, which can expand capital inflows and help stabilize the renminbi.

SAFE data showed that by the end of June, China's outstanding external debt (including those denominated in local and foreign currencies) stood at $2.636 trillion, down $74.2 billion, or 3 percent, from the end of March.

Some analysts estimated that for corporates, the upper limit of external debt might rise from 2 times their equity to 2.5 times due to the increase of the parameter; and for banks, the upper limit of external debt might rise from 80 percent of their equity to 100 percent.

The Chinese currency has faced renewed depreciation pressure against the greenback this month as interest rate levels in the United States surpassed those in China by a bigger margin as monetary policy divergence between the two economies widened.

The central parity rate of the onshore renminbi came in at 7.1668 per dollar on Tuesday, the weakest level since 2008. As of Tuesday afternoon, the onshore exchange rate of the renminbi came in at 7.3085 per dollar, down 475 basis points from Monday's close.

"Tuesday's move can help stabilize expectations in the foreign exchange market by delivering a positive signal that the central bank is poised to ramp up support if the renminbi depreciation pressure intensifies at a rapid pace," said Tang Yao, an associate professor of applied economics at Peking University's Guanghua School of Management.

If the depreciation pressure worsens excessively, it is possible for the PBOC to make use of other tools in reserve, like issuing central bank bills in Hong Kong on a large scale or even officially bringing the countercyclical adjustment factor into effect, Tang said.

Economic fundamentals, nevertheless, function as the ultimate determinants of exchange rates, Tang said, and thus it is necessary to revitalize consumption activity and private investment to promote a sustained economic recovery.

Pan Gongsheng, deputy governor of the PBOC, said on Thursday that the country will keep the renminbi exchange rate generally stable at an appropriate and balanced level while strengthening policy adjustments to create financial conditions conducive to boosting economic growth.

It is unlikely for the renminbi to register constant and rapid depreciation that is faster than the rise in the dollar index, given that the Chinese economy has entered a phase of stable recovery with a low likelihood of further policy interest rate cuts, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

The trend for the renminbi to strengthen in the long term is intact, thanks to China's continuous international payment surplus and a big net amount of overseas investment assets, the China Banking and Insurance Regulatory Commission said in a statement on Tuesday.