The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) announced on the 11th that the macro-prudential regulation parameter for cross-border financing of financial institutions will be lowered from 1.25 to 1. Analysts believe that this measure is mainly targeted at banks, restraining their ability to raise external debt and issue foreign exchange loans internally, and should have no direct impact on enterprises.
Brokerage China reports that China’s integrated macro-prudential management of domestic and foreign currency cross-border financing began in 2016, and the biggest change from the original corporate cross-border financing model is that the People’s Bank of China and the State Administration of Foreign Exchange no longer apply pre-approval of foreign debt to enterprises and financial institutions, but change to pre-contracting and filing by enterprises and post-recording by financial institutions; financial institutions and enterprises can independently conduct cross-border financing in domestic and foreign currency within the cross-border financing ceiling linked to their capital or net assets.
After the promotion of macro-prudential management of full-caliber cross-border financing, the PBoC can set and adjust relevant parameters according to the needs of macro-regulation and the results of macro-prudential assessment (MPA), make counter-cyclical adjustments to the cross-border financing of financial institutions and enterprises, adapt the level of cross-border financing to the macroeconomic heat, overall solvency and balance of payments position, control the leverage ratio and currency mismatch risks, and prevent systemic financial risks.
The upward adjustment of macro-prudential adjustment parameters in March this year coincided with the opening of a new round of quantitative easing by the central banks of many countries in response to the impact of the new crown (CCP virus) epidemic, making the market scale of low or even negative interest rates further expand. The relevant person in charge of the State Administration of Foreign Exchange said at the time, the policy adjustment, cross-border financing risk-weighted balance ceiling correspondingly increased, which will help facilitate domestic institutions in China, especially small and medium-sized enterprises, private enterprises to take full advantage of the international and domestic two resources, two markets, multi-channel to raise funds.
After a gap of nine months, the macro-prudential adjustment parameter for financial institutions was re-adjusted back to 1, aiming to control the upper limit of cross-border financing for financial institutions and prevent cross-border financing risks against the backdrop of increased two-way exchange rate fluctuations.
Since May this year, the RMB exchange rate has risen significantly, but the market generally believes that the two-way fluctuation of the RMB exchange rate will further increase in the future. In the face of increased two-way fluctuations in the RMB exchange rate, enterprises should strengthen exchange rate risk management.
Guan Tao, global chief economist of BOCI Securities, pointed out that since this measure is mainly for banks, restraining their ability to raise external debt and issue foreign exchange loans internally, it should have no direct impact on enterprises. Moreover, counter-cyclical adjustment is the need for macroeconomic regulation to prevent systemic risk.
Minsheng Bank Chief Researcher Wen Bin believes that the current new crown epidemic is still spreading around the world, the international economic environment has more unstable and uncertain factors. In particular, the U.S. economic trends, monetary policy and the movement of the U.S. dollar index will have a greater spillover effect on global financial markets. Once the U.S. dollar index reverts to appreciation, then it will cause depreciation of non-U.S. dollar currencies and cross-border capital flow back, bringing greater exchange rate risks for cross-border enterprises. Therefore, cross-border enterprises should establish the concept of exchange rate risk neutrality and make good use of exchange rate risk management tools to avoid losses caused by drastic fluctuations in exchange rates to their normal operations.
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