China tightens grip on cross-border yuan deals, continues dollar challenge

China’s central bank introduced new rules to oversee cross-border yuan deals between banks and boost the yuan’s use abroad, aiming to steady money flows and support offshore markets.

In a notice outlining the proposals, the People’s Bank of China said it plans to add a counter-cyclical tool to manage interbank, cross-border yuan financing. The mechanism is meant to temper swings and guide activity through the cycle.

The central bank also said it wants Chinese lenders to make fuller use of this channel. It will set a cap on related business that still leaves “adequate room for growth,” giving banks space to expand while keeping overall risk in check.

According to the PBOC, the draft rules are intended to “further support cross-border yuan financing by domestic banks, develop the offshore yuan market, and improve macro-prudential management of cross-border capital flows.”

Reports claim that the goal is to shore up the plumbing that moves yuan across borders while safeguarding financial stability.

Cross-border yuan financing, covering loans as well as bond repurchase agreements, is the main avenue for onshore banks to send liquidity to offshore hubs. By supplying funding to those markets, lenders help support the currency’s use overseas.

Diplomatic outreach is also continuing. The U.S. Treasury said on Thursday that Treasury Secretary Scott Bessent will meet Chinese Vice Premier He Lifeng and other senior officials next week in Madrid to keep talks going on trade, the economy and national security matters.

Investor sentiment turns bullish on yuan prospects

In markets, some investors see room for a much stronger Chinese currency.

Stephen Jen, chief executive of Eurizon SLJ Capital, said the yuan could stage a large rally as authorities face pressure to allow appreciation. The currency is up about 2.4% against the dollar this year, but it has fallen versus several other major peers because the dollar’s drop elsewhere has been even steeper.

That has created the impression of an “opportunistic devaluation,” he said, warning of possible pushback from key trading partners. The yuan traded near 7.13 per dollar on Monday.

“The low 6s would make more sense than where we are now,” Jen said, noting his “dollar smile” framework. “A more reasonably priced renminbi and a less predatory exchange rate policy would earn China some good will from the rest of the world.”

Positioning has turned more optimistic. Hedge funds have bought bullish options after recent weak U.S. jobs figures, and a sharp equity rally has raised doubts about how much more monetary easing is likely, both factors seen as supportive for the yuan.

Trade weighted yuan still down despite dollar weakness

Bank of America and Deutsche Bank also look for gains, though they target a milder 6.7 per dollar over the next year or so.

In March, Jen argued the dollar was about 20% too high and set for a multi-year adjustment. The U.S. dollar has also logged its longest losing streak since April 2023, providing a supportive backdrop for the yuan, as reported by Cryptopolitan.

Against Europe’s common currency, the yuan has slipped about 9.6% this year and more than 5% versus the British pound. On a trade-weighted basis, it is down around 4.6%.

Jen adds that Chinese firms hold roughly $2.5 trillion of liquid assets overseas that could be repatriated, while a further stock surge could invite more inflows. The CSI 300 has risen more than 20% since April lows.

“China’s financial assets remain undervalued but also under-owned,” he said. “Renminbi appreciation could help China attract some foreign investment back to the financial markets.”