In a recent movement aimed at refining the macro-prudential management of cross-border financing, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have announced a significant adjustment in parameters that govern the cross-border financing capabilities of enterprises and financial institutionsThis adjustment, which raises the macro-prudential adjustment parameter for cross-border financing from 1.5 to 1.75, is set to take effect on January 13, 2025. The decision reflects a concerted effort to deepen the financial connection between Chinese enterprises and international markets while bolstering the stability of the Chinese yuan.

Experts have pointed out that this move follows the recent issuance of offshore yuan central bank bills, further emphasizing the PBOC's unwavering commitment to maintaining currency stabilityDespite facing external pressures and fluctuations in the global economic landscape, the fundamental trajectory of China's economic recovery remains intact

The yuan possesses the necessary conditions to maintain a fundamental stability against the U.Sdollar and other currencies in the foreseeable future.

One of the primary objectives behind adjusting the macro-prudential adjustment parameter is to foster a favorable environment for the inbound flow of capitalBy elevating these limits, the PBOC aims to provide enterprises and financial institutions with enhanced access to cross-border funding, thereby allowing them to optimize their asset-liability structuresThis increase is especially crucial for small to medium-sized enterprises (SMEs) and privately-owned businesses, who can leverage both domestic and international resources more effectivelyAccess to greater amounts of foreign capital enables these businesses to better participate in cross-border trade and investment, enhancing their overall operational capabilities.

The immediate effects of the policy change were evident in the foreign exchange markets, with the offshore yuan gaining nearly 100 pips against the U.S

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dollarAnalysts noted that adjusting the macro-prudential parameters equivalent to increasing the financing quota for domestic entities will contribute positively to liquidity in the foreign exchange marketThe resulting heightened liquidity in U.Sdollars not only facilitates smoother cross-border transactions but also promotes a balanced supply and demand dynamic in the foreign exchange marketplace, thus contributing to the stability of the yuan's exchange rate.

This policy shift serves as a powerful signal from the PBOC regarding its commitment to preserving exchange rate stabilityBy preventing unilateral expectations that could lead to self-fulfilling scenarios, and by mitigating risks associated with currency over-adjustment, the PBOC aims to maintain the yuan's value within a reasonable and balanced framework.

The decision comes amid a complex and evolving global economic context, particularly in 2024, characterized by a stronger U.S

dollar and general weakness of non-dollar currenciesThe authorities have been implementing a comprehensive strategy to navigate these challenges, reinforcing expectations and enhancing management of the foreign exchange market, while encouraging rational trading behaviors among market participantsOverall, the yuan has demonstrated a relatively strong position among major currencies, with China's Foreign Exchange Trading System reporting a 4.2% appreciation of the yuan relative to a basket of currencies over the year.

Looking ahead, the expectation is that China's economic fundamentals will remain stable, with the balance of payments continuing to reflect a state of equilibriumThe resilience of the foreign exchange market is expected to be strengthened, and the value of the yuan can be sustained under favorable conditionsTo support these goals, the PBOC and SAFE have pledged to implement further policies aimed at stabilizing expectations and enhancing the robustness of the foreign exchange market

They will actively correct cyclical behaviors within the market while also addressing any disturbances that threaten orderly market conditions.

Moreover, the newly established foreign exchange market guidance committee is set to bolster the self-regulatory mechanism of the foreign exchange marketAiming to fortify industry self-discipline, this committee will oversee market participants in adhering strictly to self-discipline normsAny behaviors that disrupt market order or deliberately mislead the public will be addressed promptly, ensuring a stable exchange rate environment that serves both business and residential needsThe focus will be on fostering businesses' capabilities in managing exchange rate risks through long-term mechanisms that promote risk neutrality.

As expert Peng Ming, a senior researcher at the National Financial and Development Laboratory, pointed out, the PBOC’s toolkit for stabilizing the yuan is well-stocked and rich in options