Fri, Jan 29, 2016 page14

• Chinese face options over yuan flows

  • Bloomberg
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  China is increasingly resorting to administrative measures to curb capital outflows, while calls are mounting for further restrictions as the defense of the yuan burns through its foreign-exchange reserves.

  The tightening of controls marks a reversal after years of easing that spurred global usage of the yuan and secured reserve status for the currency at the IMF. The yuan has retreated 2.7 percent since the IMF decision was announced at the end of November last year, even as intervention to support the currency led to an unprecedented US$108 billion drop in China’s reserves last month.

  Bank of Japan Governor Haruhiko Kuroda last weekend called for Chinese policymakers to clamp down on capital flows, while former People’s Bank of China’s monetary policy committee member Yu Yongding (於永定) on Wednesday said that controls should be bolstered.

  

  Bank of Japan Governor Haruhiko Kuroda speaks at the Global Economic Output session of the World Economic Forum in Davos, Switzerland, on Saturday last week.

  Photo: Bloomberg

  Here is what has been done so far to slow the record exodus of funds that drove the yuan to a five-year low:

  ‧ Increased scrutiny of transfers.

  Some Shanghai banks have asked their outlets to closely check whether individuals sent money abroad by breaking up foreign-currency purchases into smaller transactions and to take punitive action if breaches were discovered, people familiar with the matter said.

  Each person can send US$50,000 abroad annually, so large sums can be transferred by utilizing the bank accounts and quotas of a range of individuals, a tactic known as “smurfing.”

  ‧ Curbing offshore yuan supply.

  The Chinese central bank told some onshore lenders to stop offering cross-border financing to offshore counterparts late last year and on Jan. 11 advised some Chinese banks’ units in Hong Kong to suspend offshore yuan lending unless necessary. It is also widened the scope of reserve requirements to include some yuan holdings of overseas financial institutions.

  ‧ Suspension of foreign banks.

  DBS Group Holdings Ltd and Standard Chartered PLC were among overseas banks suspended from conducting some foreign-exchange business in China until the end of March.

  The bans included the settlement of offshore clients’ yuan transactions in the onshore market and was introduced as a widening gap between the currency’s exchange rates in Shanghai and Hong Kong encouraged arbitrage trades.

  ‧ Outbound quotas frozen.

  China has suspended new applications for the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from China to be used to buy offshore securities denominated in the currency.

  It has also refrained from granting new quotas for residents to invest in overseas markets via its Qualified Domestic Institutional Investor program since March.

  ‧ Delaying the stocks link.

  China originally planned to start a link between the Shenzhen market and the Hong Kong bourse last year, but the plan was delayed amid a rout of equities in China.

  ‧ UnionPay debit-card clampdown

  New measures were introduced last month to crack down on illegal China UnionPay Co card machines, which were suspected of being used to channel funds offshore via fake transactions, most notably at casinos in Macau.

  ‧ Underground banking clampdown

  China conducted raids on the nation’s biggest “underground bank,” which handled 410 billion yuan (US$62 billion) worth of illegal foreign-exchange transactions, the People’s Daily reported in November last year.

  The Shanghai branch of the Chinese State Administration of Foreign Exchange last week said that it would crack down on illegal currency transactions, including underground banking.

  Here are some of the options that have been raised for consideration amid the funds exodus:

  ‧ Tobin tax.

  Chinese officials in October last year mentioned at least twice the possibility of taxing foreign-exchange transactions — a so-called Tobin tax — to reduce volatility. People’s Bank of China Deputy Governor Yi Gang (易綱) said the move could counter short-term capital flows that aim for arbitrage.

  ‧ Devalue.

  China will probably have to devalue its currency to combat slowing economic growth, Goldman Sachs Group Inc president Gary Cohn said last week at the World Economic Forum in Davos, Switzerland.

  His comments came a day after Chinese Vice President Li Yuanchao (李源潮) said that the government has no intention and no policy to devalue the yuan.

  ‧ Muddle through.

  China could continue with the current mix of verbal support, onshore and offshore intervention, and dialing back capital-account opening.

  The central bank is considering new measures to prevent high volatility in the exchange rate in the short term and will continue direct intervention in the currency market, people familiar with the matter said this month, without disclosing which specific tools were being discussed.

  ‧ Free float.

  China will seek to increase the yuan’s convertibility in an orderly manner in the next five years by changing the way it manages currency policy and opening up the finance industry, according to the Chinese Communist Party’s five-year plan through 2020.

  Policymakers were preparing to announce a 2020 deadline to dismantle currency controls, according to people familiar with the plans.

  ‧ Limit repatriation of earnings.

  Policymakers are seeking to restrict the access for international companies to repatriate their earnings made in China, the Wall Street Journal reported on Wednesday, citing people familiar with the matter.

  The Chinese State Administration of Foreign Exchange denied that this was the case, saying profits can be sent overseas provided banks review the transfers to check for compliance with regulations.
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