Capital outflow fight: What analysts see next
AS CASH continues to flood out of China, expectations are growing that the authorities will erect higher barriers.
With the country’s capital outflows last year estimated at US$ 728 billion by Standard Chartered, and the yuan predicted to continue declining against the dollar in 2017, analysts have been casting forward to what the authorities may do next to stop funds from fleeing.
Recent measures include restrictions on buying insurance products in Hong Kong, limiting overseas acquisitions and investments, and demanding more details from citizens when converting their annual quota into foreign exchange.
China’s currency regulator says such steps have been taken to strengthen existing policies, and don’t equate to capital curbs. “China will not return to walking the old path of using capital controls under a planned economy,” the State Administration of Foreign Exchange said in emailed comments last Wednesday. SAFE will evaluate plans to deal with capital flows “prudently” before implementing them, a regulatory official said at a briefing last Thursday, without giving details.
Here’s what analysts say China may do next:
• Limit overseas spending. The government may cap UnionPay credit- card spending by its citizens abroad on highvalue products such as art and antiques, said Robin Xing, chief China economist at Morgan Stanley. Chinese buyers helped push up prices at auctions in recent years. Billionaire Liu Yiqian used his American Express card to pay the US$ 45 million ( RM203 million) bill for a 15th century Tibetan embroidered silk thangka last year.
• Pressure exporters. The biggest move authorities can make would be to force exporters to sell their foreign- exchange proceeds, said Brad Setser, a senior fellow at the Council on Foreign Relations in New York and a former US Treasury Department official.
Such a step would help tackle one of the key sources of the yuan’s weakness. Chinese exporters converted the equivalent of 56 per cent of their overseas revenues into yuan in November, compared with a monthly average of 71 per cent in the four years through 2013, when the currency was gaining.
A measure like this would require outflows to pick up significantly, since it could disrupt trade, said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group. It would be “a move backward from the vision of a China that’s more seamlessly integrated into the global financial system,” Setser said.
• Tax currency transactions. The currency regulator said in March last year China was considering imposing a tax on foreign- exchange trading to limit capital outflows. The nation’s central bank has already drafted rules for such a measure, people familiar with the matter told Bloomberg News that same month.
A so- called Tobin tax would complicate plans by China to boost the yuan’s global role and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy. The Tobin tax takes its name from US economist James Tobin, who in 1972 suggested taking a cut of foreign- exchange trades to limit currency speculation. History is littered with government attempts to extract revenue from financial transactions, not all of which were successful and most of which had unintended consequences.
• Clamp down on bitcoin. Chinese investors increasingly turned to the crypto- currency to hedge against the weakening yuan and take cash out of the nation, helping bitcoin rally to beat every major currency, stock index and commodity contract in 2016.
While the US$ 14 billion total value of bitcoin makes it minor relative to most asset classes, it’s sensitive to any moves by China to curb trading. Bitcoin has tumbled 6.1 per cent this year after central bank officials visited exchanges and warned investors about the dangers of trading the asset.
Policy makers are likely to require more reporting from bitcoin exchanges and incorporate their flows into the monitoring of citizens’ annual US$ 50,000 quota to buy foreign exchange, said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.
• Control banks. China’s cash exodus has been partly driven by an increase in financial institutions’ overseas assets. Outflows via loans rose to US$ 37.2 billion in the third quarter, near a record in balance of payments data going back to 1998. Policy makers can probably discourage state banks from building up foreign assets, and may have done so last quarter, said CFR’s Setser. — WP-Bloomberg