New foreign exchange rules necessary as outflows grow: experts
The Chinese government's newly released rules on foreign exchange purchasing, which specifically prohibit overseas real estate purchases, will "make it much more difficult" for domestic investors to buy houses abroad, but are conducive to tackling rising speculative purchases that "blindly follow the trend," experts told the Global Times on Monday.
The new rules, launched by the State Administration of Foreign Exchange (SAFE) over the weekend, include a more detailed foreign exchange purchasing application form and a blacklist for illegal foreign exchange transactions, as the government grapples to close loopholes in the domestic foreign exchange purchasing system.
The new form, which the Global Times accessed online from the Industrial and Commercial Bank of China, asks foreign currency buyers for detailed information regarding their buying purpose.
The form listed six areas where buyers are prohibited from doing, including providing false information, lending or borrowing quota for foreign currency swaps, and engaging in money laundering, tax evasions and other illegal activities. SAFE's $50,000 quota per year for buying foreign currency remains unchanged.
It also specifically said that individual investors can not buy foreign currencies for purchasing real estate abroad or investing in overseas stocks or insurance or other "yet open" assets.
Impact on property purchases
An employee of Global House Buyer, a real estate agent specializing in overseas assets, said that buyers used to accumulate foreign currencies by using the $50,000 quota multiple times. They also tended to gloss over the real purpose of buying houses with excuses such as tourism.
Buyers can make foreign exchanges for eight purposes including tourism, education and trade, but details such as their travel method and destination are asked, the new form said.
It is a new requirement that was not in place before, according to a Beijing resident who applied for currency exchange in September for a trip to the UK.
The tightened policies would make it harder for Chinese citizens buying houses overseas using tourism as an excuse, the real estate agent said. "Buyers might need to largely extend the process of foreign currency exchange, with more risks," the agent told the Global Times on Monday.
According to a statement from SAFE on Saturday, people who conduct illegal foreign exchanges will be blacklisted, and restricted or prohibited from buying foreign currency for several years.
Currency buyers can also be fined for up to 30 percent of the amount traded if they use the currency for any purpose other than what they stated on the form, according to the new application.
"But I think there are ways to bypass the rules," the Global House Buyer employee said, without disclosing more.
The government's policy regarding purchases homes overseas is still "a bit ambivalent" and some people might use relatives to move money overseas in small quantities to purchase a house, Yan Yuejin, research director of the E-house China R&D Institute, told the Global Times on Monday.
"Between 2010 and 2015, Chinese investors bought more than $17 billion of US commercial real estate," according to Huffington Post's report in May.
Yan said that most Chinese investors buy overseas property based on speculation of further yuan depreciation.
Stopping outflows
SAFE also demanded that banks shoulder more responsibility for ensuring the compliance of foreign exchange transactions.
Banks are required to report all yuan-denominated cash transactions exceeding 50,000 yuan ($7,200) to the People's Bank of China (PBC), the country's central bank, according to a document released by the PBC on Friday. Prior to the change, the threshold was 200,000 yuan.
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, said it is necessary for the government to use administrative measures to manage foreign exchange transactions, at a time when the capital outflows continue to grow.
"The domestic capital outflows in 2016 are expected to exceed $160 billion this year, up from $100 billion in 2015. The growth rate is too fast, not to mention that a big part of that cash flow might be illegal," Dong told the Global Times on Monday.
The capital outflows come at a time when the rising dollar has caused the yuan to depreciate since mid-2015.
The China Foreign Exchange Trade System announced on Thursday that from Sunday the number of currencies in its basket would increase to 24 from 13, which lowers the US dollar's weighting from 26.4 percent to 22.4 percent.
