Foreign banks banned from lending to Chinese businesses

China’s central bank has barred Chinese companies from borrowing renminbi from foreign banks, state media reported. The People’s Bank of China (PBoC) told foreign banks in mid-July it will stop accepting applications for direct offshore borrowing from mainland companies. The restriction appears to be part of Beijing’s attempts to tighten monetary policy and prevent hot money flowing into China to abritrage the increasing value of the renminbi. According to one anonymous source, because foreign banks tend to offer lower interest rates on renminbi loans than domestic banks, there is a risk that increased lending from overseas banks could complicate Beijing’s efforts to reduce domestic liquidity. “This is not the renminbi settlement in cross-border trade that the PBoC wants to promote,” the source said. However, one analyst said that the central bank cannot fully ban the practice: Chinese firms with overseas subsidiaries can simply borrow money using the subsidiary, then transfer the funds back into domestic accounts.