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China loses control over capital outflow: Central Bank decides to accept unique measures. Yuan strengthens after collapse in No

It became known last week that China had launched new capital controls to halt capital outflows disguised as mergers and acquisitions.

 

Also, it has limited the possibility of Chinese companies to invest overseas. However, Beijing is obviously trying to slow a capital outflow against the background of the devaluation of the yuan and uncertain economic prospects.

Beijing was said to focus on “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.

Such deals will have to receive approval from China’s top economic planning agency.

To summarize, in just the past month, China has unveiled at least three distinct sets of "controls" aimed at curbing capital flight out of China. At a time when, analysts, including Goldman, say that the true extent of capital outflows is far greater than what is reported by the central bank.

China is actively fighting against any possibilities of circumvention of prohibitions. For example, Beijing wants to limit the movement of Bitcoin, because it is one of the most common mechanisms to bypass capital controls. Besides that, China has curbed gold imports.

Bankers said that some banks with licenses have recently had difficulty obtaining approval to import gold. This is an attempt by Chinese authorities to stop a weakening of yuan by tightening outflows of dollars.

Thus, the world’s largest gold consumer began to have a greater impact on prices.

But that is not all, the PBOC added a fourth unique form of capital control. It supposed to limit the amount of yuan that Chinese companies and individuals can remit outside the country. Such measure is being implemented for the first time in more than two decades in China. And all this is to stem the yuan’s outflow against the background of the devaluation, which lasted until the middle of this week.

Currently, companies, located in China, will be limited to net currency outflows. According to Order No. 306 issued by the People’s Bank of China, they can transfer abroad only 30% of its own funds.

 

In addition, the PBOC has imposed other restrictions:

  • Financial institution has to have been registered for at least a year before it is provided with an opportunity to withdraw funds within the limit;

  • Financial institution can’t use debt financing for purpose of an overseas loan to a foreign entity;

  • Party making a yuan loan must first register the loan with SAFE system;

  • Lenders should have a share in capital of borrower;

  • Banks should "strongly examine the use of yuan abroad" to eliminate the possibility of fictitious and inappropriate transactions;

  • Interest rates for loans need to be above 0%;

  • Credit payment period must be from 6 months to 5 years;

  • Loans with maturities of 5 years need to be registered at local PBOC branches;

  • If borrower cannot justify a delay in payment, banks should stop processing of accounts and to inform the Central Bank.

This is a stunning reversal in government policy, which had previously set a long-term goal to internationalise the renminbi (the official name of the yuan), culminating with the renminbi's admission into the IMF's SDR basket.

Needless to say, the latest announcement will hardly impress the IMF which has been pushing for less government control of the currency.

And it means that Beijing cannot just deal with the outflow and devaluation simply through market operations. And the answer to the question, whether China is running out of money, is becoming more obvious with every new introduced barrier

Yuan is strengthening after the collapse in November.

Strengthening the yuan, which started at the beginning of the week, is a result of a controlled devaluation carried out by Beijing in the second half of November. Then yuan dropped to historical marks of 2008 during repeated depreciation against the background of dollar’s strengthening, because of the unexpected victory of Trump and anticipated protectionist policies of the future president.

In summer, the Chinese People's Bank published a statement, according to which it would begin to use a variety of tools to maintain an adequate level of liquidity in the interbank market and keep interest rates at reasonable levels.

 

It should be reminded that the Chinese currency remained relatively long time at around 8.3 yuan per dollar until it started to strengthen in the summer of 2005. Since autumn of 2008, the Chinese currency had been stable at 6.8 per US dollar, and it began to grow again in September 2009. The peak of strengthening was recorded in January 2014, when 1 dollar was equal to about 6 yuan.

In August, the PBOC weakened exchange rates of the national currency at 3% - from 6.40 to 6.20, which shocked stock markets. Later, the Chinese regulator weakened yuan in three phases: in the winter of 2015/16 to 6.55, then in July 2016 to 6.67 and the last wave began in October 2016 and still continues.

 Sourceoko-planet

  • December 9, 2016 12:45 PM MSK
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