China’s capital crackdown results in 1tril yuan bust

CHINA’S campaign to crack down on illegal capital outflows saw its currency regulator bust underground banking operations that involved more than one trillion yuan (RM620.12 billion), according to a newspaper published by the country’s central bank.

The State Administration of Foreign Exchange also seized US$8.43 billion (RM35.32 billion) in foreign exchange funds as part of the nationwide checks on illegal outflows, the Financial News reported yesterday, citing Zhang Shenghui, an official at the regulator.

The news underscores both the desire of Chinese to diversify money out of their country and the determination of authorities to restrict outflows that put pressure on the nation’s currency and trigger even greater capital flight.

The yuan has depreciated 7.8 per cent against the US dollar since the People’s Bank of China’s mini-devaluation in August last year. It has fallen one per cent this month alone.

“As regulators tighten the formal channels, underground activities seem to be heating up,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd in Hong Kong.

China has repeatedly shown it’s prepared to play hardball when it comes to heading off any disorderly declines in the yuan, including through ramping up offshore yuan borrowing costs in Hong Kong.

Chinese investors determined to squirrel money out have turned to life-insurance policies in Hong Kong, camouflaged tourist spending abroad and faked trade invoices among their creative methods.

Declining yuan deposits in offshore banks also point to the demand to get money into other currencies. A flurry of investment banks recently have warned that capital outflows could be larger than anticipated amid ongoing demand for foreign currency.

Deutsche Bank AG expects outflows will intensify in the next few months as economic growth slows and the yuan weakens.

Goldman Sachs Group Inc analysts have estimated that outflows may be larger than they look because an increasing amount of capital is exiting the country in yuan rather than in dollars.

While China’s currency reserves have stabilised and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low, official data show that US$27.7 billion in yuan payments left China in August. Such large cross-border moves couldn’t be explained by market-driven factors and needed to be taken into account when measuring currency outflows, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs. Bloomberg

ILLEGAL OUTFLOWS: Authorities prepared to play hardball to protect local currency