Although the regulations did not take effect until June 1, their impact was felt immediately. The yuan ended its upward trend against the US dollar on May 6, closing at 6.1667, down 112 basis points from the previous trading day — the steepest decline since December last year. On the same day, stricter controls on capital inflows caused the offshore renminbi to close at 6.1790 against the US dollar, down 0.4 percent — the largest drop since January last year. This suggests that the measures will succeed in stemming upward pressure on the yuan.
At the same time, the new regulations aim to end many firms’ practice of channeling capital into China disguised as trade bills. By inflating export deals in order to move foreign currency — mostly US dollars — into China, firms have evaded capital controls and distorted trade data. In order to transform the funds into renminbi outflows, the firms then increase the scale of renminbi settlements in cross-border trades. In March and April, cross-border yuan trade settlement increased by 412.8 billion yuan, up 57.6 percent year on year.
The growing discrepancies between foreign-trade data and port data have cast doubt on the reliability of the former. Last year, China’s exports grew by about 6.2 percent, and container throughput completed at China’s above-scale ports increased by 6.8 percent year on year.
By contrast, in the first quarter of this year, Chinese foreign trade increased to US$974.6 billion, reflecting a higher growth rate than last year, while Chinese ports completed 800 million tonnes of cargo throughput, representing a growth rate that was 4.2 percentage points lower than in the same period last year. In March, container traffic at China’s above-scale ports was 15.29 million TEUs (twenty-foot equivalent units), with month-on-month growth 1.7 percentage points slower than in the previous two months.
Clearly, trade data are being inflated as companies carry out fake transactions to bring capital into the country. Firms know that as long as the hot money can reach mainland banks through Hong Kong, they can expect risk-free yields of more than 2 percent. Considering the renminbi’s recent appreciation, the rate of return could reach 3 percent to 4 percent.
According to the new regulations, SAFE will issue a warning 10 days after finding that a firm’s capital flows do not match its physical shipments. Such firms will be more closely monitored for at least three months, until the relevant figures return to normal.
One can only hope that these measures will be sufficient to bring China’s export data gradually back to reality. At a minimum, the new measures are an important step toward improved management of cross-border capital flows, which is bound to benefit China’s economic transformation and restructuring significantly.
Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies and a researcher at the China Macroeconomic Research Platform.
Copyright: Project Syndicate