January 31, 2018 / 9:21 AM / 10 months ago

China central bank: Cross-border yuan financing settings meant to curb 'herd' effects

BEIJING (Reuters) - China’s central bank said on Wednesday variable policy settings around cross-border yuan account financing are aimed at helping curb “herd” effects in markets and improving the country’s financial supervision.

FILE PHOTO: A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/File Photo

The central bank was responding to Reuters’ queries about how the People’s Bank of China set limits around banks’ cross-border yuan account financing.

Earlier this month, the PBOC said in a short statement on its Weibo microblog account that the upper limit on Chinese commercial banks’ cross-border financing is determined by their outstanding deposits and a counter-cyclical factor, which was 3 percent currently.

Under central bank rules issued in 2009, Chinese commercial banks are allowed to provide yuan account financing for selected overseas banks, with upper limits on it set at 1 percent of their outstanding deposits.

That implied a counter-cyclical coefficient of 1 percent, the central bank said, adding that this was raised to 3 percent in July 2013 in line with China’s economic and financial conditions, and that has been in place since then.

The counter-cyclical management of cross-border yuan financing will help curb “volatile market sentiments and large-scale ‘herd’ effects caused significant fluctuations in cross-border capital flows”, the PBOC said in the statement.

This practice is in line with macro-prudential policies recommenced by the Financial Stability Board (FSB) and the International Monetary Fund (IMF), the central bank said.

The adjustment aims to “further facilitate cross-border trade and investment, support the healthy development of cross-border renminbi (yuan) business and improve cross-border financing of commercial banks”, the central bank said.

A slide in the yuan CNY=CFXS and China's foreign exchange reserves in 2016 prompted regulators to restrict capital outflows, including a clampdown on "irrational" outbound investments.

There are some signs of a revival in the international use of the yuan after several years in the doldrums, but China policy sources said they don’t expect any significant relaxation of capital controls, even as the yuan rebounds.

Reporting by Beijing Monitoring Desk and Kevin Yao; Editing by Sam Holmes and Richard Borsuk

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