China added new restrictions on pulling yuan out of the nation as authorities seek to prevent a flood of capital outflows from destabilizing the financial system.
Officials will not approve requests to take the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason, people familiar with the measures drafted by China’s central bank said.
The monetary authority has noticed that funds are increasingly leaving the country as yuan payments, said the people, who asked not to be named because they were not authorized to disclose the measures.
China is throwing up fresh administrative roadblocks to contain capital outflows before a likely US interest-rate increase next month and the reset of Chinese citizens’ US$50,000 annual foreign-exchange quotas next month.
The equivalent of US$275 billion exited the country via yuan payments this year through October, versus a US$101.5 billion inflow in the same period last year, as the Chinese currency weakened to an eight-year low against the US dollar.
“The underlying depreciation pressure on the yuan has picked up enough to cause alarm,” said Sean Callow, a senior strategist at Westpac Banking Corp in Sydney. “The People’s Bank of China has lots of weapons at its disposal, so they should be able to slow the pace of capital outflows and thus relieve the pressure on the yuan in the short term, but if it is true that new restrictions are being imposed on capital flows, then it is a setback for the long-term plan to open up China’s financial markets and internationalize the yuan.”
The new measures, which follow a raft of other steps this year to restrain outflows, suggest that China is placing more emphasis on preserving foreign-exchange reserves than targeting a particular level for the yuan, said Raymond Yeung (楊宇霆), lead greater China economist at Australia & New Zealand Banking Group Ltd in Hong Kong.
After keeping the currency steady at about 6.7 yuan per dollar from July through September, the central bank has since allowed the currency to weaken beyond 6.9, a level last seen during the global financial crisis in 2008.
Meanwhile, foreign-exchange reserves declined last month by the most since January.
“It is smart to use administrative measures to reduce capital outflows and defend the exchange rate, because China’s foreign reserves are dropping,” said Ken Cheung, a Hong Kong-based Asia currency strategist at Mizuho Bank Ltd. “Chinese authorities understand the capital outflow pressure is persisting, but will only let it run its course at an orderly pace.”
China also will further standardize companies’ outbound direct investment, bolster inspections on whether deals are real and develop a system for firms to report big cross-border fund movements in advance, the people said.
The People’s Bank of China did not immediately reply to a fax seeking comments.
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