Central Bank Loosens Cross-border Restrictions to Boost RMB Internationalization

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Thinning capital outflows and increasing exchange rate stability have paved the way for China’s central bank to loosen recently introduced settlement restrictions.

Chinese media reports that the People’s Bank of China’s latest window guidance no longer requires that commercial banks strictly implement a 1:1 payment and receipt restriction on cross-border RMB settlement operations.

The decision made by the PBC last week has already translated into shifts in practice and policy amongst Chinese lenders.

Staff from the cross-border operations departments of multiple banks have reported receiving verbal instruction from their head offices about the cancellation of payment ratio restrictions and set amounts for RMB cross-border payments.

The move is believed to be part of efforts to further internationalise the RMB, as well as response to reduced capital outflows and increased stability of exchange rates.

Capital outflows prompted tightening of exchange restrictions 

PBC previously issued a notice in the middle of January requiring that commercial banks not exceed a 1:1 payment and receipt ratio during cross-border RMB settlement, as part of efforts to staunch capital outflows.

This essentially meant that a slight RMB cash surplus would need to be retained during RMB operations, and that payments of currency could not exceed receipts.

Capital outflows have eased considerably since the start of the year, however, with central bank data indicating that China’s foreign reserves had risen for two consecutive months by March to reach over USD$3 trillion.

Data from China’s State Administration of Foreign Exchange further indicate that foreign exchange settlement and sale deficit had narrowed for three consecutive months by March to 46.3 billion yuan.

In addition to this change in currency flows, several other factors also favoured further loosening of RMB restrictions.

One analyst points out that the depreciation of the US dollar meant that the PBC did not have to be concerned about the idle, offshore RMB funds of companies being lent by overseas speculators for short-selling purposes.

Another is factor spurring loosening of restrictions has been increasing demand for RMB amongst state trading companies doing business abroad, such as those operating under China’s “One Belt One Road” policy, who have been wont to squirrel away Chinese yuan to facilitate swaps as well as pay for Chinese products that they intend to sell in other regions.

PBC intent upon internationalisation of the RMB

According to industry observers the PBC’s loosening of the ratio restriction is part of efforts to further advance the internationalisation of the Renminbi since its ceding of several small steps.

Data from SWIFT indicates that international usage of the Chinese yuan has been unsteady over recent years. While the Renminbi accounted for 2.3% of international payments at the end of 2015, ranking fifth amongst the world’s currencies, last year this figure fell to 1.7%, pushing it back to sixth place.

Data from the IMF also indicates a recent slight receding in the Renminbi’s international importance, with its first Composition of Foreign Exchange Reserves (COFER) data showing that the Chinese yuan ranks eighth amongst currencies held as part of official foreign exchange reserves, comprising 1.07%.

Cross-border settlement experts note that the two figures are related, with a decline in the use of RMB for international payments impeding its incorporation into the official foreign reserves of other countries.

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