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January 8, 2016 9:39 am
China steps up capital controls to stem outflows
Gabriel Wildau in Shanghai
China's dwindling foreign exchange reserves
China is ratcheting up ad hoc capital controls to stem accelerating capital outflows, with banks restricting dollar purchases amid fierce demand from households and companies.
The foreign exchange regulator has provided verbal guidance to banks in Shenzhen instructing them to limit dollar buying by individual and corporate clients, according to a person with knowledge of the situation.
The official Shanghai Securities News cited client managers at banks in Shenzhen including Industrial and Commercial Bank of China and Bank of China as saying that demand for US and Hong Kong dollars had increased sharply since the start of the year. Chinese residents are permitted to buy up to 50,000 dollars annually, with the quota resetting at the beginning of the calendar year.
“They’re focused on Shenzhen and Shanghai because that’s where demand has really spiked,” said the person.
The renminbi stabilised on Friday but is headed for a loss of 0.8 per cent on the week, its worst since the central bank’s surprise move in August to allow the currency to weaken. China’s foreign exchange reserves declined by a record 108bn dollars in December, a sign of accelerating capital outflow and the central bank’s spending to support the renminbi exchange rate.
The latest tightening comes after the central bank temporarily suspended some foreign banks in China, including Standard Chartered, Deutsche Bank and Singapore’s DBS, from conducting certain foreign exchange transactions designed to arbitrage the gap between the onshore and offshore renminbi exchange rates. All three banks declined to comment.
Chinese importers and exporters have long been sensitive to shifting exchange rate expectations, calibrating their foreign currency management accordingly. What is new, traders and bankers say, is the increased demand from households.
Until the renminbi’s trading range was widened in 2014, appreciation was virtually uninterrupted. But Chinese households are now more eager to sell their renminbi and diversify their currency holdings.
Online foreign exchange settlement at multiple banks have suffered temporary outages or slow response times as demand from retail customers overwhelms their capacity, Shanghai Securities News reported.
At a mid-sized bank in Shanghai, customers are restricted to buying 5,000 dollars in foreign exchange per day unless they make an appointment in advance and 10,000 dollars per day if they do, with no more than three appointments allowed per week, the paper reported.
A Beijing-based finance executive said SAFE had been in “regular discussions” with foreign banks over the past month. “They are basically trying to make sure that banks are not helping speculators with leverage,” the executive said. “If your client needs three months’ trade finance but borrows one or two years’ worth of forex, is that legitimate hedging?”
The Financial Times reported in September that the State Administration of Foreign Exchange had ordered banks to strengthen checks on foreign exchange deals, in a partial reversal of moves in recent years to cautiously liberalise controls on cross-border capital flows.
Above the 50,000 dollars annual limit, companies and individuals must present documentation proving that the conversion is linked to trade, foreign direct investment or other approved purposes in order to buy or sell foreign exchange.
Meanwhile, traders and analysts suspected the People’s Bank of China may have intervened in Hong Kong’s offshore renminbi market on Thursday, using state-owned banks to sell dollars.
The gap between onshore and offshore exchange rates hit a record on Wednesday, with the offshore currency trading 2.5 per cent weaker than onshore. The widening gap has been a source of embarrassment for Beijing, as the central bank has said it wants to bring the two rates into line.
SAFE did not immediately respond to a fax requesting comment on Friday afternoon.
Additional reporting by Martin Arnold in London
Twitter: @gabewildau
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