China’s forex reg­u­la­tor tight­en­ing con­trols to stem cap­i­tal out­flows

Reg­u­la­tor vet­ting trans­fers abroad

Kuwait Times - - BUSINESS -

China is step­ping up mea­sures to stem cap­i­tal out­flows af­ter its yuan cur­rency skid­ded to more than eight-year lows, sources said yes­ter­day, tak­ing aim at out­bound in­vest­ments that have soared to a record high. The State Ad­min­is­tra­tion of For­eign Ex­change (SAFE) has be­gun vet­ting trans­fers abroad worth $5 mil­lion or more and is in­creas­ing scru­tiny of ma­jor out­bound deals, even those with prior ap­proval, sources with knowl­edge of the new rules told Reuters.

Cap­i­tal out­flows, both le­gal and il­le­gal, have pres­sured the yuan. The Chi­nese cur­rency has de­pre­ci­ated nearly 6 per­cent against a strong dol­lar this year and many traders are bet­ting on fur­ther losses, rais­ing the spec­tre of more cap­i­tal flight. The new rules would gov­ern trans­fers abroad un­der the cap­i­tal ac­count for trans­ac­tions such as port­fo­lio or for­eign di­rect in­vest­ment, and could knock some mo­men­tum from China’s over­seas as­set shop­ping spree, an­a­lysts say. Chi­nese out­bound in­vest­ment deals to­talled $530.9 bil­lion in the first nine months of 2016, sur­pass­ing 2015’s record vol­ume and help­ing China out­strip the United States as the top ac­quirer for for­eign com­pa­nies, Thom­son Reuters data show.

“The new rules will have a very big im­pact on out­bound deals,” said Luke Zhang, a part­ner at Zhong Lun Law Firm, who ex­pects the num­ber of deals to go down “quite a lot”. SAFE al­ways sup­ports le­git­i­mate and com­pli­ant over­seas di­rect in­vest­ments, the reg­u­la­tor said on its mi­croblog late. “Pre­vi­ously, only forex trans­fers worth $50 mil­lion or more needed to be re­ported to SAFE. Now, the thresh­old has been dras­ti­cally low­ered to $5 mil­lion, and cov­ers both for­eign cur­rency and yuan,” said one of the sources with di­rect knowl­edge of the rules. “All we can do is to ask clients to be pa­tient, and tell them that the trans­ac­tion is be­ing vet­ted by SAFE for au­then­tic­ity and may not be ap­proved.”

One of the sources said that even if an out­bound in­vest­ment had al­ready ob­tained ap­proval to buy for­eign ex­change, but the money had not been fully trans­ferred, the re­main­der of the quota was now sub­ject to fur­ther ap­proval if it ex­ceeds $50 mil­lion, which is re­garded as a “large sum”. Two other sources con­firmed the new rules. The sources said the forex reg­u­la­tor told banks about the new rules on Mon­day, the same day the gov­ern­ment said it would stick to its “go­ing out” strat­egy of en­cour­ag­ing out­bound in­vest­ment.

De­fend­ing the yuan

China has been us­ing its for­eign cur­rency re­serves to keep the yuan from fall­ing too rapidly against the dol­lar, man­ag­ing mar­ket ex­pec­ta­tions, and re­strict­ing out­flows into over­seas se­cu­ri­ties. Wang Zheny­ing, a se­nior Chi­nese cen­tral bank re­searcher, said in a re­cent in­ter­view that Bei­jing needed to stem out­flows that risk putting the yuan into a po­ten­tially de­struc­tive feed­back loop. “At the mo­ment, the fall in the yuan’s ex­change rate is shap­ing mar­ket ex­pec­ta­tions. De­pre­ci­a­tion trig­gers cap­i­tal flight, and cap­i­tal flight ex­erts even big­ger pres­sure on the yuan,” Wang said.

“There­fore, it’s nec­es­sary to break this feed­back loop... for ex­am­ple, by slow­ing cap­i­tal out­flows,” he said. Chi­nese state-owned banks were seen sell­ing dol­lars in the on­shore for­eign ex­change mar­ket for a se­cond straight day yes­ter­day, in what traders called a bid to sup­port the yuan. The yuan has re­bounded around 0.5 per­cent in the past few ses­sions. While still the largest in the world, China’s for­eign cur­rency re­serves have fallen to $3.17 tril­lion at the end of Septem­ber from a $3.99 tril­lion peak in June 2014, in­di­cat­ing that au­thor­i­ties sold dol­lars to prop up the yuan’s value.

Sell­ing of the yuan and other emerg­ing mar­ket cur­ren­cies has in­ten­si­fied since Don­ald Trump’s upset pres­i­den­tial vic­tory on Nov 8. Ex­pec­ta­tions of higher fis­cal spend­ing and in­ter­est rates un­der a Trump ad­min­is­tra­tion have boosted US bond yields and the lure of the dol­lar. The new curbs, if adopted, are likely to have an im­pact on deals, said Greg Burch, who works on mid-mar­ket China out­bound M&A deals as a Hong Kong-based part­ner at the Locke Lord law firm. Stronger cap­i­tal con­trols could also af­fect China’s push to in­ter­na­tion­al­ize the yuan and would raise ques­tions about where cap­i­tal will flow in­ter­nally, as prop­erty prices are al­ready high, Burch added. “If you pinch a bal­loon in one place, it just bulges in an­other.” — Reuters

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