China Reduces Metric for Overseas Borrowing to Rein In Capital Inflow
What’s new: China’s central bank Friday tightened its risk assessment on cross-border borrowing, a move intended to rein in a surge of capital inflow amid the yuan’s rise.
The People’s Bank of China and the State Administration of Foreign Exchange will lower a parameter on cross-border financing in macro-prudential assessments for financial institutions from 1.25 to 1, they said in a statement. The change will reduce financial institutions’ capacity to borrow abroad.
“Financial institutions should establish a 'risk-neutral' concept to better serve the development of the economic society,” the regulators said.
Why it matters: The adjustment will reduce the access of financial institutions and companies to foreign financing, curbing capital inflows, said an executive of a major bank.
Analysts said the move reflects regulators’ effort to tame risks from overseas borrowing, which has surged as the yuan strengthened over the past few months. As of the end of June, outstanding foreign debt of Chinese financial institutions increased $75.1 billion from the beginning of the year.
The tightening move reversed a March adjustment by the central bank to increase the cross-border financing parameter from 1 to 1.25, making it easier for domestic businesses to raise funds overseas and boost the virus-hit economy.
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