Domestic businesses in China have been barred from borrowing RMB from foreign banks in the latest move to tighten monetary policy, Shanghai Securities News reported Tuesday.

China's central bank, the People's Bank of China (PBOC), told banks in mid-July that it would stop accepting applications for direct offshore borrowing from mainland companies.

A source told the newspaper that as the interest rate to borrow RMB from foreign banks is not restricted by the central bank's benchmark interest rates, if the lending is too big, it will affect the domestic RMB loan market. "This is not the RMB settlement in cross-border trade that the PBOC wanted to promote," he added.

The current domestic credit environment is tight but foreign lending is comparatively loose. Lending rates in the offshore market are lower compared to domestic banks. In order to reduce financing costs, some enterprises tend to seek loans from foreign banks, the report said.

Li Bo, head of the Monetary Policy Department II of PBOC, said earlier at the 2011 Lujiazui Forum that domestic bodies borrowing RMB from overseas should be regarded as an issue facing the management of capital and financial accounts as well as an issue of foreign debt management. "We are discussing with related departments to set up a management system for RMB debt. Before that, we will launch several pilot projects," Li said.

One analyst said the ban may be related with taking precautions against "hot money" flows.

However, the central bank cannot fully ban the borrowing as enterprises could source money from foreign banks through its overseas parent company and then transfer the funds to the domestic subsidiaries, according to an industry insider.