Regulations are not permanent as China pushes toward yuan internationalization: expert
Regulators in China have increased scrutiny over companies' foreign exchange transactions this year, but the shift has had a limited impact on normal trade and investment abroad, according to interviews with several merchants and experts.
"From 2015, officials from the State Administration of Foreign Exchange [SAFE] started to thoroughly and carefully check whether our company's foreign exchange transactions, especially those settled in US dollars, matched our trade data. They seldom did so in the past. Now it happens almost every three to six months," a woman surnamed Ren told the Global Times Wednesday.
Ren has been engaged in bilateral trade with clients in Singapore for years. She is not the only one claiming that control over foreign exchange transactions was tightened recently.
"Almost every company that has an offshore account is required to sign a statement to authorize those banks to shut down their offshore accounts without prior notice," another trader surnamed Chang told the Global Times Wednesday. "We are told this is a measure to prevent risks from abnormal cross-border capital outflows."
Offshore accounts are a major channel for Chinese companies to purchase foreign exchange abroad, according to Chang, who has been exporting mechanical products to India over the past 10 years.
In 2015, the People's Bank of China (PBC), the country's central bank, ordered banks to strengthen oversight of foreign exchange transactions to curb cross-border currency arbitrage between the onshore and offshore yuan.
"Authorities' supervision over cross-border yuan outflows has indeed become tighter this year, which slowed down companies' globalization to some extent," said Liu Xuezhi, an analyst at Bank of Communications.
But those regulations are necessary at the moment when the yuan has already depreciated significantly under pressure from the domestic economic downturn and the US Federal Reserve's likely rate rise, Liu told the Global Times Wednesday.
"Capital outflows can hasten the yuan's depreciation."
The Chinese currency has weakened more than 6 percent against the US dollar this year, the China Securities Journal reported on Wednesday. On November 28, the yuan fell to its lowest rate since June 2008, with the dollar closing at 6.912 yuan onshore and 6.926 yuan offshore.
China's foreign exchange reserves stood at $3.05 trillion in November, down 2.2 percent from October, the lowest level since March 2011.
Unidentified sources quoted by Reuters in late November said that the SAFE was taking new measures to tighten control over capital outflows such as the threshold for vetting transfers abroad being lowered from $50 million to $5 million.
The PBC has reportedly circulated new rules for yuan-denominated loans to entities abroad, which must first register with the SAFE before lending.
In response to those reported actions, the SAFE said in an e-mailed reply to the Global Times on December 7 that the authorities always support enterprises in carrying out "legitimate and compliant" overseas direct investments.
Ren and Chang as well as two other cross-border investors interviewed by the Global Times said that they did not feel overly fazed by such moves. "We can still purchase foreign exchange from banks for our normal trading businesses and investment," said Ren.
Liu said the latest regulations are not permanent and Chinese authorities are unlikely add new measures to stem the longer-term decline in the country's foreign exchange reserves.
"Control over foreign exchange transactions will become less and less, otherwise the yuan's internationalization as well as the 'One Belt and One Road' initiative will face headwinds," said Liu.
