China’s central bank and the State Administration of Foreign Exchange have raised the macro prudential adjustment coefficient for domestic firms making overseas loans from 0.3 to to 0.5.

After the adjustment, the upper limit of overseas loans made by domestic firms will be raised accordingly, the People’s Bank of China said on Tuesday.

The move will help meet Chinese companies’ demand for capital when they make overseas investments, and help expand the cross-border use of the Chinese yuan, it said.

As the world’s second-largest economy presses ahead with its reform and opening-up policy, with the signing of several regional and multilateral free trade agreements, Chinese mainland companies have  stepped up the pace to go global. This translates into a notable increase in their demand for capital overseas, said Wen Bin, chief analyst at China Minsheng Bank.

Such a move, which virtually increases the supply of the Chinese currency, will also help balance the overseas supply and demand on yuan to essentially maintain the stability of the exchange rate, said Zhou Maohua, an analyst at China Everbright Bank’s financial market department.

After the adjustment, the upper limit of overseas loans made by domestic firms will be raised accordingly, the People’s Bank of China said on Tuesday

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Wang Dan, chief economist of Hang Seng Bank China, said the move aims to encourage companies to take renminbi out of the country and purchase foreign exchange overseas. “This is part and parcel of the PBOC’s dynamic adjustment on cross-border capital,” he said.

 “The decision will encourage capital to flow out of the Chinese mainland in an orderly manner,” said Guan Tao, chief economist of the Bank of China International. It comes at a time when the supply of foreign currency exceeds the demand and the home currency faces mounting appreciation pressure.

Guan expected the nation’s foreign exchange policy for the next 12 months to be a combination of strengthening the exchange rate flexibility, boosting capital outflows and keeping capital inflows under control.

The Chinese currency got off to a strong start in 2021, boosted by the nation’s economic recovery from COVID-19 after the authorities successfully controlled the coronavirus.

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On Tuesday, the central parity rate of renminbi against the US dollar made the biggest one-day rise since July 2005 when China dropped a decade-old peg against the greenback.

This came after the onshore-traded renminbi on Monday crossed the important 6.5-percent dollar threshold for the first time since June 2018.

In December, the central bank tightened the way it assesses cross-border financing risks for companies as China’s economy stages a strong recovery from the pandemic.

As of 4pm on Wednesday, the onshore yuan remained flat at 6.4549 per dollar, while the offshore yuan hovered at 6.4368 against the greenback.