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MNI BRIEF: PBOC Eases Capital Inflow Controls As Yuan Slides

MNI (Singapore)
MNI (Beijing)

The People’s Bank of China has eased controls on capital inflows as it steps up efforts to curb weakness in the yuan, which dropped to its lowest level against the U.S. dollar since early 2008.

The central bank announced on its website on Tuesday that it had raised the macro-prudential adjustment parameter for cross-border financing of companies and financial institutions from 1 to 1.25. The PBOC said the change would "increase sources for the cross-border financing of companies and financial institutions." Analysts estimate the change will raise the ceiling on the outstanding cross-border financing quota by 25%.

The hike will facilitate capital inflows, said Minsheng Bank chief economist Wen Bin. The move will help stabilise the yuan via increased U.S. dollar liquidity in domestic markets, he noted.

The adjustment parameter was last increased from 1 to 1.25 in March 2020 to encourage companies to seek financing abroad. The PBOC lowered it back to 1 in January 2021.

Tuesday's move comes after the central bank lifted the risk reserve requirement ratio on forward foreign exchange sales in late September to stop traders selling yuan in the forward market. (See MNI BRIEF: PBOC Hikes Risk RRR On FX Forwards As Yuan Weakens). The PBOC also cut its FX reserve requirement ratio in early September in a bid to bolster U.S. dollar liquidity. (See MNI: PBOC Response May Be Needed As Yuan Breaches 7 - Analysts).

The PBOC is viewed as having ample tools to manage the weakness in the yuan. Former State Administration of Foreign Exchange senior official Guan Tao told MNI this week that intervention is one of many tools the central bank could consider. (See MNI INTERVIEW: PBOC FX Intervention Still An Option - Guan Tao)

The PBOC set CNY daily fixing at 7.1668 on Tuesday, the weakest since Feb 2008 and 530 pips below sell-side estimate, the narrowest error in four days. Spot CNY gapped higher at the open of Tuesday's session and traded to a 7.3070. (See CNY : USD/CNY Just Shy Of Upper Daily Trading Limit, Tweak To Macro-Prudential Rules)

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