What’s new: China has taken action to arrest the yuan’s slide.
The country raised the macroprudential parameter for financial institutions and nonfinancial businesses’ cross-border financing from 1.25 to 1.5 on Thursday, according to a joint announcement by the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange in the morning.
The onshore and offshore yuan both strengthened against the U.S. dollar following the announcement.
The background: The macroprudential parameter is one of the tools the government uses to manage the yuan’s rate. A higher parameter will raise the cap on relevant businesses’ borrowing abroad, which can encourage more capital inflows and increase domestic forex supply.
Before the raise on Thursday, the parameter had been adjusted several times in recent years.
Adjusting the parameter can guide market expectations by signaling that the yuan’s fluctuations have exceeded the PBOC’s tolerance, and that the central bank may intervene further if volatility remains high, according to Zhang Qidi, a visiting researcher at the Center for International Finance Studies of the Central University of Finance and Economics.
However, the tool has a limited scope of influence, as businesses’ cross-border financing affects only part of the yuan’s supply and demand, Zhang wrote in an analysis published in Caixin.
Meanwhile, when the parameter is raised, the tool’s effect depends on companies’ willingness to borrow more from overseas.
The Chinese currency has slumped against the greenback in recent months amid a weak domestic economy. The onshore yuan closed at 7.2197 per dollar on Wednesday, weakening about 4% from the end of April.
Related: Six Tools China Uses to Manage Its Currency
Contact reporter Zhang Ziyu (ziyuzhang@caixin.com) and editor Jonathan Breen (jonathanbreen@caixin.com)
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