Damming the flow
Experts said reported actions by China's central bank to curb overseas yuan lending are among a string of measures taken by the regulator to stabilize the yuan and preserve the country's declining foreign exchange reserves. Illegal practices have long existed, and the new curbs, if enacted successfully, could help lower expectations for yuan depreciation in the future.
Reported actions by China's central bank to further regulate overseas lending are among the many actions authorities are taking to stabilize the yuan's exchange rate, experts said.
The People's Bank of China (PBOC), the country's central bank, has circulated new rules for Chinese enterprises that make yuan-denominated loans to entities abroad, Reuters reported on Thursday, citing sources with direct knowledge of the matter.
The report said that lenders who make a yuan loan to an overseas entity must first register with the State Administration of Foreign Exchange (SAFE) and must observe specific limits on the size of the loans.
The monetary authority has discovered that funds are increasingly moving out of the country as yuan payments, Bloomberg reported on Wednesday, citing unnamed sources.
The equivalent of $275 billion exited the country via yuan payments in the first 10 months of 2016, according to Bloomberg.
The central bank's new rules are just the latest regulations aiming to tighten controls over cross-border yuan outflows, such as stricter measures implemented in February over the purchase of insurance products in Hong Kong. Last week, authorities lowered the threshold for vetting transfers abroad from $50 million to $5 million.
Stabilizing the yuan
Experts believe the measures aim to stem the decline in the country's foreign exchange reserves and bolster a depreciating yuan, which fell to eight-year lows at the end of November.
The PBOC and SAFE had not replied to faxed inquiries from the Global Times for confirmation and comments as of press time on Monday.
A banking analyst who is familiar with the matter of cross-border capital flows told the Global Times over the weekend that the rules, if enacted successfully, could effectively stem capital outflows aimed at short-term arbitrage.
"If enterprises and individuals makes loans, especially short-terms loans to overseas borrowers, the money will most likely be used to buy dollars overseas," the analyst said, noting that this is one way to circumvent domestic capital control rules and move money out of China.
When there is a large volume of yuan buying U.S. dollars overseas, it further weakens the yuan's offshore exchange rate against the dollar, causing the spread between onshore and offshore exchange rates to widen, the analyst noted.
The yuan is traded at different exchange rates on the Chinese mainland and abroad. For instance, on November 28, when the yuan fell to its lowest rate against the U.S. dollar since June 2008, the dollar traded at 6.912 yuan onshore and at 6.926 yuan offshore when the market closed.
A wider spread has two consequences. It entices arbitrage via other channels, and it increases market expectations that the yuan will further depreciate, the analyst said.
"From this respect, the move to tighten controls over overseas lending should be understood as a way to control the expectation of and the pressure on yuan depreciation," the analyst noted.
A bank employee who is familiar with overseas lending practices said that the move will impact the yuan's exchange rate, China's foreign-exchange reserves and the real economy.
"One result of the tightening measures is that yuan depreciation will slow, or in other words, stabilize the currency's exchange rate," the employee told the Global Times on condition of anonymity because he is not authorized to speak to the media.
The employee said rapid yuan depreciation could hasten the pace of capital fleeing China and damage the country's real economy, though it does help Chinese exporters.
"Generally speaking, a stable yuan is the best thing for China's real economy," the bank employee said.
"The downside of this regulation, if enacted, is that some of the real demand by companies would also be affected to a certain extent, and we can see how the regulator is weighing the pros and cons," the employee noted.
Preserving reserves
The analysts said the yuan has been declining too quickly of late, so the more important task for regulators is to stabilize the yuan to take some of the pressure off the country's foreign exchange reserves.
After a relatively stable period from July to September, the value of the yuan has since plunged from about 6.7 yuan per dollar to more than 6.9 yuan per dollar, PBOC data showed.
In October, China's foreign exchange reserves experienced their largest monthly decline since January, shedding $45.7 billion to $3.121 trillion, the lowest level since March 2011, according to SAFE.
Some experts see the tightening measures as an effective way to curb the decline in the country's foreign exchange reserves.
"When the yuan stabilizes, the central bank will be under less pressure to sell dollars from the foreign exchange reserves to hold up the exchange rate," the above-mentioned bank employee said.
Despite these concerns, the central bank said in a post on its website on November 27 that the yuan remains a strong currency.
In a separate event over the weekend, Wei Benhua, a former top SAFE official, said China still has ample foreign exchange reserves.
"At the current level of $3.121 trillion, the nation's reserves can meet all of its demands, including paying for the nation's imports and ensuring payment of principal and interest on foreign debt, among other purposes," Wei told the Global Times on Friday.
China has enough reserves to cover 10 months worth of imports, Wei said. Typically, having enough foreign currency reserves to cover three months worth of imports is considered sufficient.
Some have raised concerns that the regulators' moves could be a setback for the long-term plan to internationalize the yuan, Bloomberg reported.
"The yuan's internationalization is a goal for this century. It is not a goal for one or two years," the banking analyst said. "Currently, the focus is on stabilizing the yuan."
