(Yicai Global) July 20 -- The Chinese yuan strengthened against the US dollar after China’s central bank relaxed a cross-border financing rule to enable businesses and financial institutions to borrow more from abroad and guide them to optimize their asset-liability structure.

The onshore yuan pushed beyond 7.18 versus the dollar from 7.22 at yesterday’s close after the People’s Bank of China and the State Administration of Foreign Exchange raised the macro-prudential adjustment parameter to 1.5 from 1.25 today. The offshore yuan also appreciated to approach the 7.18 level.

The PBOC and SAFE introduced a macro-prudential management framework for full-scale cross-border financing in 2016, allowing domestic entities to borrow from overseas according to their needs. The macro-prudential adjustment parameter effects the maximum proportion of net assets Chinese firms can borrow through cross-border financing.

The yuan-dollar exchange rate stands at about 7.2, and today’s adjustment reflects the intention of the regulators to reasonably guide expectations, China Economic Network reported, citing Minsheng Bank Chief Economist Wen Bin.

Once domestic foreign exchange funds increase, the corresponding increase in demand for foreign exchange settlement will also climb and steady the exchange rate, Wen noted.

The PBOC lowered the macro-prudential adjustment parameter to 1 from 1.25 in December 2020 and January 2021, when the yuan was gaining against the dollar. Last October, when the yuan was depreciating versus the greenback, the PBOC raised it to 1.25 from 1. 

In recent years, the PBOC has accumulated a rich experience in responding to external shocks and has enough tools in reserve to counter them, Deputy Governor Liu Guoqiang said on July 14, adding that the central bank will not lose focus nor take a ‘whatever’ attitude.

In the future, it will be enough for regulators to continue guiding market expectations by adjusting the reserve requirement ratio for foreign currency deposits, the risk RRR for forward foreign exchange sales, the cross-border financing leverage ratio, and the macro-prudential adjustment parameter, Wen said.

Editor: Futura Costaglione