Growing confidence in yuan helps relax capital outflow curbs
CHINA’S central bank has relaxed some of the curbs on cross-border capital outflows it put in place just months ago to shore up the yuan currency, banking sources have said.
The first easing of the measures comes as China’s leaders and financial markets feel more confident that pressure on the yuan and the country’s foreign exchange reserves has diminished, thanks largely to a pullback in the surging US dollar. Bullish bets The yuan slumped nearly 6.5 percent against the dollar last year, but has firmed closer to 1 percent in 2017, defying – for now – many analysts’ expectations of further depreciation. A poll earlier this month indicated investors increased their bullish bets on the yuan to the most since July 2015.
With less incentive for capital flight and the economy on steadier footing, China’s foreign exchange reserves have clawed back above the closely watched $3 trillion (R40trln) level. Premier Li Keqiang said on Tuesday that market confidence in the yuan has significantly improved, the Xinhua news agency reported.
As of last week, the People’s Bank of China (PBOC) is no longer demanding that banks match outflows with equal in- flows, the sources said.
The South China Morning Post first reported the relaxation of the capital controls earlier yesterday.
The PBOC was not immediately available for comment. The State Administration of Foreign Exchange also did not respond to questions.
Expectations of further yuan depreciation have eased in recent months, opening a window for authorities to relax recent measures.
But Beijing is not likely to let go totally, said Raymond Yeung, chief Greater China economist at ANZ in Hong Kong. The PBOC is no longer demanding that banks match outflows with equal inflows.
In addition to checking exchange rate expectations, the authorities were also using capital controls to control where Chinese money flows, limiting investments in foreign sectors deemed undesirable, he noted.
“The current macro environment obviously favours an easing of the (rules on) fund flows, but that doesn’t mean that it is going to have solved the structural issue of the mismatch between the corporate desire to go out versus the central government’s centrally-driven approach when they talk about offshore investment,” Yeung said.
While the world’s second-biggest economy still has the largest stash of forex reserves by far, it had burned through more than half a trillion dollars since August 2015 trying to support the yuan.
The government reacted by intensifying capital controls late last year, making it harder for individuals and companies to move money out of China. Stabilise currency Those measures are credited with quashing speculative outflows and helping to stabilise the currency, but have also hampered legitimate outflows as China Inc goes more global.
Chinese businesses have complained that the curbs were damaging their plans for overseas investments and acquisitions, while foreign firms have been more reluctant to invest in China for fear of having trouble repatriating profits.
In March, the US owner of Dick Clark Productions said that one of its affiliates terminated an agreement to sell assets to Chinese conglomerate Dalian Wanda Group.
But the small relaxation step won’t help much in terms of outbound investment approvals, 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. “This particular move won’t help on real M&A deals… It’s like the brakes aren’t totally locked up any more, but the foot is still on the brake pedal pretty hard,” said Burch.
On Tuesday, China reported that its non-financial outbound direct investment slumped 30.1 percent in March from a year earlier as authorities kept a tight grip on outflows. In the first quarter, it fell nearly 49 percent.
While Beijing says it supports legitimate overseas investment, regulators have warned they would pay close attention to “irrational” investment in property, entertainment, sports and other sectors.
The sources did not spell out what criteria would still be applied to outflows.
Much will depend on the outlook for the US currency, which analysts expect to rebound eventually as the Federal Reserve continues to slowly raise interest rates. – Reuters