China’s central bank, the People’s Bank of China (PBOC), has instructed domestic lenders to reduce outward bond investments, according to sources familiar with the matter. The directive, issued this week, aims to limit the supply of yuan offshore by restricting southbound purchases under the Bond Connect scheme. This move is part of a series of measures taken by the PBOC to support the yuan and make it harder to short the currency against the US dollar.
The PBOC’s guidance comes as China’s financial markets experience losses and heavy outflows, and investors become impatient with the lack of forceful action to address the stalling economy. Policymakers see stabilizing the currency as an urgent task, as the currency weakness poses a challenge to Beijing’s efforts to revive economic growth. Major monetary easing measures could further exacerbate yuan depreciation pressure and accelerate capital outflows.
The directive to restrict outward bond investments could reduce mainland capital flowing out through the bond market and drive offshore yuan yields higher to support the renminbi, according to Ken Cheung, chief Asian FX strategist at Mizuho Bank. The yuan has depreciated more than 5% against the US dollar this year, reaching a 10-month low of 7.3180 per dollar last week. Although it has since stabilized, the spread between onshore and offshore forwards has widened to its widest in five years, indicating a squeeze for offshore short sellers.
Under the Bond Connect scheme, mainland institutional investors can purchase Hong Kong traded bonds. At the end of July, they held around 426.98 billion yuan ($60 billion) in offshore paper. It is unclear whether the request to reduce holdings refers to banks’ investments or those owned on behalf of clients. However, July saw a decrease of 24.6 billion yuan from the previous month, following other efforts to stall short sellers.
In addition to restricting outward bond investments, the PBOC has also been urging banks to stop subscribing to Negotiable Certificates of Deposit (NCDs) issued by offshore banks. This is another step aimed at cutting offshore yuan trade. By restricting the flow of yuan to the offshore market, the PBOC aims to tighten offshore yuan liquidity and raise financing costs, striking against foreign yuan bears.
China’s central bank has also increased yuan bill sales in Hong Kong to tighten liquidity in the offshore market and stabilize the yuan. State-owned banks have been buying yuan in onshore and offshore foreign exchange markets, and major state-owned banks in China have been drawing down offshore yuan liquidity in London and New York trade, leading to a sudden rise in yuan forwards.
The PBOC’s efforts to support the yuan and limit offshore supply come as China faces economic challenges and capital outflows. By taking these measures, policymakers hope to stabilize the currency and revive economic growth.
What are the potential negative consequences of overly stringent regulations on outbound investments for China’s integration into the global financial market
Ve down the demand for foreign currency, thus helping to stabilize the yuan. The Bond Connect scheme allows international investors to access China’s $13 trillion bond market without the need for a local trading account. However, the PBOC’s move to limit southbound purchases under the scheme will restrict foreign investors’ access to Chinese bonds and decrease outbound investments.
The PBOC’s latest directive is part of a broader effort to support the yuan and prevent excessive speculation against the currency. In recent months, the Chinese central bank has taken several measures, such as tightening control over capital outflows, increasing foreign exchange market oversight, and implementing daily reference rates for the yuan against a currency basket, to stabilize the yuan and manage market expectations.
China’s currency weakness has been a concern for policymakers, as it creates volatility in the financial markets and adds pressure to the already slowing economic growth. A stable and strong yuan is crucial for Beijing’s efforts to revive the economy and maintain investor confidence. By limiting outward bond investments, the PBOC aims to reduce capital outflows and stabilize the currency, discouraging investors from shorting the yuan against the US dollar.
However, some experts argue that overly stringent regulations on outbound investments could also have negative consequences. They warn that restricting capital flows too much could hinder economic growth and reduce China’s integration into the global financial market. It is a delicate balancing act for the PBOC, as it needs to stabilize the yuan without stifling economic activity and international investment.
China’s central bank is under pressure to take bold actions to address the country’s economic challenges. The ongoing trade tensions with the US, slowing domestic demand, and rising debt levels have put strain on the Chinese economy. The PBOC’s latest directive on outward bond investments is one of the many measures it is taking to support the yuan and stabilize the financial markets.
