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The week in renminbi: Counter-cyclical factor tamed but not gone, PBoC puts new ceiling on cross-border RMB financing, CSRC tightens grip on private bonds

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By Noah Sin
22 Jan 2018

China Foreign Exchange Trade System (CFETS) insists that the counter-cyclical factor remains in place, the Chinese central bank introduces a new limit on cross-border financing for commercial banks, and China Securities Regulatory Commission (CSRC) reportedly cracks down on risky private bond issuance.

FX:

  • The counter-cyclical factor, a currency adjustment used to the fix the daily rate of the renminbi, has been switched to a neutral position, according to a January 19 statement by China Foreign Exchange Trade System (CFETS).
    CFETS said the counter-cyclical factor, which was introduced last May, successfully eliminated the herd effect causing volatility and reflected the real value of the renminbi. But it could be activated again should the RMB exchange face violent swings again, CFETS added.
    The counter-cyclical factor was added to the daily fix formula to buffer extreme movements in the RMB exchange rate, although regulators never made clear what the mechanism involved. GlobalRMBpreviously reported that the People’s Bank of China had removed the counter-cyclical factor, a claim supported by market analysts at the time.

Regulators:

  • The PBoC has introduced a counter-cyclical coefficient to manage cross-border RMB flows, Xinhua reported on January 19. The upper limit of RMB cross-border financing for commercial banks – currently set at 3% – will be determined by their outstanding deposits and the new counter-cyclical element.
  • Yin Yong, deputy governor of the PBoC, was appointed the deputy mayor of Beijing on Friday, according to a January 19 state media report. It is not immediately clear if Yin will step down from his role at the central bank, given that his profile as deputy governor remains unchanged on the PBoC’s website.

Bonds:

  • The CSRC has barred companies which have been fined and warned by regulators within the last six months to issue bonds in the private placement market, a January 19 Chinese media report has claimed. Issuers can also be banned if they have a key subsidiary – an entity which holds more than 30% of the parent company’s assets, net assets or operating revenues – which has defaulted before, according to the media report.
  • The financing cost of RMB bonds remained cheaper offshore in December 2017 – but the gap between the two markets are narrowing – according to Bank of China’s Credits Investment and Financing Environment Difference (CIFED) Index.
    The index stood at 89.1 points at the end of December, down 31.2 points in the previous month. BOC attributed the index’s decline to a stronger offshore RMB, which is trading closer to the onshore RMB than in previously months.

Equities:

  • Hong Kong Exchanges and Clearing (HKEX) has proposed that Stock Connect investors should be able to use the dollar or Hong Kong dollar – but not the two together at the same time – as cash collateral on the day of their transactions, according to a January 18 circular by the bourse.
    Should the proposal be accepted, investors would get an early release of their purchased securities after putting forward their dollars or Hong Kong dollars. Only the renminbi is accepted as collateral for the equity link at the moment. Settlements will continue to be done in offshore renminbi.
    The new arrangement would come into force in the second quarter, should Securities and Futures Commission approve the plans.

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By Noah Sin
22 Jan 2018