China’s Central Bank Limits Outward Investments, Aims to Stem Yuan’s Slide

China’s central bank has instructed some domestic banks to reduce their outward investments through the Bond Connect scheme in an effort to support the Chinese yuan. This move comes as part of a series of measures aimed at curbing the decline of the currency. The guidance from the People’s Bank of China is intended to limit yuan flows into Hong Kong and restrict the supply of yuan in offshore markets. The central bank’s directive could reduce mainland capital outflows through the bond market and drive offshore yuan yields higher to support the renminbi. The southbound leg of the Bond Connect scheme allows mainland institutional investors to purchase bonds traded in Hong Kong. This latest measure is seen as a strike against foreign yuan bears and is aimed at tightening offshore yuan liquidity and raising financing costs. China has been taking various steps to defend its currency, including raising the cost of shorting the yuan offshore and tightening liquidity in the offshore market. The central bank has also urged banks to stop subscribing to Negotiable Certificates of Deposit issued by offshore banks. The measures come in response to the weakness of the Chinese economy and capital outflows, which have put pressure on the yuan. The currency has fallen about 5% against the dollar this year and hit a 10-month low recently. The Thomson Reuters Trust Principles are followed in reporting this news.