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China takes new steps to encourage inflows, US dollar supply

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China is moving to entice foreign investment into the country even as pressure on the yuan eased.

[NEW YORK] China is moving to entice foreign investment into the country even as pressure on the yuan eased.

Policy makers plan to allow banks to supply more US dollars by lowering the floor for foreign-exchange settlement positions by a combined US$100 billion, and make it easier for companies to convert cash from abroad into yuan, the State Administration of Foreign Exchange said on its websiteon Friday. It will also crack down on illegal money transfers via fake international trades.

The Chinese authorities are taking advantage of the recent stability in the yuan to bolster its ability to defend the currency after a selloff earlier this year rocked global financial markets and depleted its foreign reserves.

The central bank responded to a selloff in the US dollar by strengthening its currency fixing Friday the most since a peg was dismantled in July 2005.

"While the overall situation of the foreign exchange market has improved and stabilized since 2016, the foundation of the balance is still not solid," the Safe said in the statement.

PBOC Move

The foreign-exchange regulator also said that it will allow cash settlement for currency forwards, in addition to physical delivery. The move will help companies to increase their hedging capacity while deepening the foreign-exchange market.

In a separate statement, the People's Bank of China said it will expand a pilot program of cross-border financing management to be available nationwide, allowing companies and financial institutions to sell foreign-currency debt without pre-approval from regulators.

The so-called macro prudential management will help the PBOC to better safeguard the financial system by controlling leverage and mitigating currency mismatches, according to the statement on the central bank's website.

"PBOC and SAFE work together to widen fund inflow channels," said Iris Pang, an economist at Natixis Asia Ltd in a note Friday.

BLOOMBERG