China formulates new rules for foreign yuan bank lending to boost yuan use

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China plans to ease restrictions on the ability of domestic banks to provide yuan-denominated loans abroad, a further step in its strategy to boost the global use of Chinese currency.

The proposals were made by the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange in a draft (link in Chinese) of the new regulations released on Saturday. The rules, which apply to 27 onshore banks, place limits on the total amount of overseas loans banks can make in yuan and foreign currencies, improve risk prevention and unify regulations covering the two types of loans. ready.

“The regulations (…) aim to better meet the demand for capital from foreign companies, to effectively serve the real economy and to promote trade and investment facilitation,” said a statement accompanying the project.

If the regulations are implemented, they will remove restrictions that currently allow companies to borrow yuan for use abroad only in limited circumstances – investing abroad as part of the country’s exit policy , conclude contracts for foreign projects and export credits. They will also encourage banks to provide loans denominated in yuan rather than loans in foreign currencies.

The changes underscore renewed efforts by policymakers to boost the internationalization of the yuan and help the country reduce its dependence on the US dollar. China recently launched a long-awaited cross-border wealth management connect test program in the Great Bay region and authorized the opening of the southern part of the Bond Connect program which will allow mainland Chinese investors to trade bonds offshore in Hong Kong. Both are expected to boost cross-border use of Chinese currency.

The yuan is only a fraction of the global currency market. End of March, 2.45% of global foreign exchange reserves were held in yuan, making the Chinese currency the fifth largest in the world’s foreign exchange reserves – after the US dollar, euro, yen and pound sterling – according to data from the International Monetary Fund. The yuan was the fifth most active currency for global payments in value in July, with a share of 2.19%, according to the most recent data from SWIFT, the Society for Worldwide Interbank Financial Telecommunication. That’s more than the 1.81% share two years ago, but still far behind the US dollar, which had a share of around 40% in July, and the British pound, which had around 6%.

In his last Annual Report (link in Chinese) on the internationalization of the yuan released on Saturday, the PBOC pledged to further support investments by foreign central banks, monetary authorities and reserve management departments in yuan-denominated reserve assets. “We will continue to improve the policy support system and infrastructure arrangements for the cross-border use of the renminbi, promote the two-way opening of the financial market, develop the offshore renminbi market and create an environment more convenient for market players. the renminbi.

The report showed that at the end of June, yuan-denominated onshore financial assets held by foreign institutions and individuals, including stocks, bonds, loans and deposits, stood at 10,260 billion yuan ($ 1.6 trillion), 42.8% more than a year earlier.

While the proposed regulations give banks more leeway to extend yuan loans abroad, they also tighten controls on how much banks can lend. The project sets an upper limit on each bank’s outstanding foreign loans based on a formula in the PBOC’s macroprudential assessment framework that takes as parameters the Tier 1 net capital of a bank and the leverage ratio of its foreign loans. The parameters can be adjusted to reflect the need to control cross-border capital flows at different times.

The draft also stipulates that overseas loans should only be used for purposes within the current scope of a business and cannot be transferred to China. They also cannot be used to invest in securities or to repay offshore loans backed by onshore guarantees.

Contact reporter Tang Ziyi ([email protected]) and editor Nerys Avery ([email protected])

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