PBOC Loosens Cross-border Capital Flows to Boost Financial Opening

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The Chinese central bank has launched new measures to expand cross-border capital flows amidst an ongoing push for greater financial sector opening from Beijing.

On 18 May the People’s Bank of China (PBOC) issued the “Notice Concerning Arrangements to Further Improve Cross-border Fund Flow Management and Support Financial Market Opening” (关于进一步完善跨境资金流动管理 支持金融市场开放有关事宜的通知).

The Notice stipulates that offshore RMB clearing banks may engage in interbank borrowing and lending, cross-border account financing and interbank bond market repo transactions under the existing policy framework, in order to provide greater liquidity support to offshore RMB operations.

The Notice further states that starting from the date of its release RMB clearing banks located in Hong Kong and Macau will not be required to hold deposit reserves at the Shenzhen and Zhuhai branches of PBOC.

Lu Zhengwei (鲁政委). chief economist with Industrial Bank Co., said to Securities Daily that the move marks a return to neutrality compared to the previously implemented tight capital controls.

The move is consistent with current market expectations for the stability of RMB exchange rates, as well as the trend of further expansion of financial sector opening and further marketisation of RMB exchange rates.

E Yongjian (鄂永健), chief financial analyst with the Bank of Communications Financial Research Center, said that allowing clearing banks to engage in interbank lending and other operations would be of benefit to providing greater liquidity to cross-border renminbi operations, increasing the ability to boost short-term renminbi funds, and expediting the development of cross-border renminbi operations.

According to Wang Youxin (王有鑫), forex researcher with Bank of China’s International Financial Research Institute, the move focuses more on the loosening of remittance channels.

“In the past if parties to offshore transactions used Shanghai-Hong Kong Connect or Shenzhen-Hong Kong Connect to invest in A-shares, remittance would be a problem, and it was only possible to conduct exchanges in Hong Kong, where the price could only be determined by the offshore RMB exchange rate,” said Wang.

Wang points out that the new Notice gives the market a greater range of pricing options, allowing offshore investors to use the onshore rate to purchase currency.

Following the expansion of Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect schemes as well as the incorporation of A-shares into the MSCI Emerging Markets Index, Wang says that there will be an inevitable increase in the volume of cross-border capital directed towards domestic Chinese shares.

This will necessitate an increase in offshore renminbi liquidity and exchange pricing options, which is also an integral part of China’s financial sector opening, and will serve to advance the usage and acceptance of the renminbi abroad.

 

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