PBoC and SAFE move to allow Chinese firms greater access to foreign capital

The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have raised the macro-prudential adjustment parameter for cross-border financing from 1.5 to 1.75, effective January 13, 2025.

This is a significant move in China’s monetary and regulatory policy landscape. Here’s a breakdown of what this means:

What is the Macro-Prudential Adjustment Parameter?

• It is a regulatory tool used by the PBOC and SAFE to manage cross-border financing by enterprises and financial institutions.
• This parameter influences the upper limit of foreign debt that companies and financial institutions can borrow.
• Raising the parameter allows entities to borrow more from foreign markets, thereby increasing cross-border capital flows.

Key Implications

1. Enhanced Access to Foreign Capital:

   • Increasing the parameter enables enterprises and financial institutions to secure more funding from abroad.
   • This move could support domestic liquidity and business financing needs, especially for sectors heavily reliant on foreign investment or funding.

2. Support for Economic Growth:

   • By easing restrictions on cross-border borrowing, the measure aims to bolster economic activity and support growth during challenging economic conditions.
   • This aligns with broader efforts by Chinese authorities to stabilize the economy amid slowing domestic demand and global uncertainties.

3. Impact on the Yuan:

   • Higher cross-border borrowing could lead to increased foreign currency inflows, potentially stabilizing or strengthening the yuan if managed effectively.
   • However, it may also increase external debt obligations, which could pressure the yuan in the longer term if repayment risks rise.

4. Alignment with Policy Goals:

   • This adjustment reflects the government’s ongoing commitment to maintain financial stability while promoting foreign investment and cross-border financing.
   • It also suggests an accommodative stance, likely aimed at supporting businesses amid global uncertainties, such as geopolitical tensions or trade imbalances.

Potential Risks

1. Debt Sustainability:

   • Higher foreign borrowing could increase external debt burdens for Chinese enterprises, especially if global interest rates remain elevated.
   • Debt servicing risks may rise for smaller or heavily indebted firms.

2. Currency Volatility:

   • Greater capital inflows and outflows may lead to fluctuations in the yuan’s exchange rate, requiring careful management by the PBOC.

3. Global Capital Market Impact:

   • Increased access to foreign capital markets by Chinese entities could influence global bond and currency markets, depending on the scale of borrowing.

Market and Investor Takeaways

• Investors: The move could be seen as a positive signal for China’s capital markets, providing greater funding flexibility for businesses and boosting investor confidence.
• Enterprises: Firms with international operations or funding needs may benefit from the expanded borrowing capacity.
• Policymakers: This adjustment underscores China’s balancing act between fostering economic growth and managing financial risks.

This article was written by Eamonn Sheridan at www.forexlive.com.