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China eases limits on overseas debt

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Beijing has eased restrictions on Chinese companies seeking to raise funds overseas, after a record monthly decline in China's foreign exchange reserves in August.

The decision to loosen capital controls on inbound funds stands to boost capital inflows at a time when big domestic stock market losses and the slowing Chinese economy are heightening concerns about capital outflows.

China's top planning agency, the National Development and Reform Commission, has made it easier for Chinese companies to obtain foreign currency bank loans or issue renminbi bonds with a term of more than one year, according to a statement on its website dated Tuesday.

"The new policy will simplify the process for Chinese entities to issue offshore bonds. It will give Chinese companies flexibility in terms of timing and the amount of bonds issued as long as it is within the approved foreign debt quota," said Ivan Chung, head of greater China credit research at Moody's in Hong Kong.

Previously, companies needed approval on a deal-by-deal basis but now they are only required to register with the regulator. "Like Shanghai-HK Stock Connect, it is another step forward in integrating the Chinese financial market with the world," Mr Chung said.

China's foreign exchange reserves fell 2.6 per cent to $3.557 trillion in August, a monthly $94 billion drop that was the sharpest on record, as the People's Bank of China sold down some of its stockpile to support the renminbi.

​Data from the Bank of International Settlements show that foreign bank claims on China shrank by $77 billion in the first three months of 2015, reflecting their reluctance to lend and Chinese borrowers' increasing wariness of taking on foreign currency debt.

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"On one level it's encouraging to see that China has not lost its appetite for pro-market liberalisation, even as volatility and uncertainty have risen. It suggests the leadership understands that problems revealed by market forces can be addressed by market forces as well," says Michael Kurtz, chief Asia equity strategist at Nomura in Hong Kong.

However, he said it was not clear that Chinese firms would immediately embrace the more open overseas borrowing environment, "given expectations for both a depreciating renminbi and for rising US dollar borrowing costs vs falling domestic borrowing costs". Markets are awaiting a decision from the US Federal Reserve on Thursday on whether to raise interest rates for the first time in nearly a decade.

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The NDRC also said it would encourage companies with good credit quality and strong debt repayment ability to raise money overseas for high-priority construction and investment projects such as the "One Belt, One Road" campaign to develop ties along the old Silk Road trading route.

Meanwhile, China is considering implementing restrictions on automated trading in its commodity markets, according to market participants who spoke to the FT.

The new regulations would define automated traders, require their identity and source of funds to be disclosed and limit the number of trades they could place in the futures markets.

"A few years ago the exchanges began researching this type of unified management because programme trading is different from other trading behaviour and can cause shocks," said one exchange official who did not want to be named. "After the August 16 crash, this discussion has sprung up again."