China tightens capital controls

According to the Financial Times, China's State Administration of Foreign Exchange (SAFE) has ordered financial institutions to increase checks and boost controls on foreign exchange transactions. The move was targeted mainly at the practice of over-invoicing of exports which companies use to hide capital outflows, the British business daily wrote Wednesday, quoting unnamed sources and an internal memo.

In a similar report Bloomberg News quoted Tommy Ong of DBS Bank Hong Kong as saying: "The main objective is to reduce volatility, curb capital outflows and limit depreciation pressure on the yuan."

In the four quarters to the end of June, such outflows, excluding debt repayment, totaled more than $500 billion (446 billion euros), according to data from US bank Citigroup. The outflows are partly responsible for China's dwindling foreign currency reserves, which were once running at around $4 trillion, and are now down to less than $3.6 trillion, Citigroup calculated. The bank expects reserves to drop to $3.3 trillion by the end of the year.

Clampdown on speculators

In the past few years, China softened its currency controls as the yuan became more widely used in transactions across the world. The new tightening of controls, however, is seen as a policy reversal and comes after controversial yuan devaluations in August, in which Beijing allowed the yuan to float 5 percent lower in a currency band tied to the US dollar.

Beijing said the move was part of broader economic reforms aimed at shifting towards a more flexible exchange rate. The suddenness and scale of the devaluation in the normally stable unit sparked worries the world's second-largest economy was performing worse than revealed.

In related news, China's central bank, the People's Bank of China (PBOC), announced Tuesday it would require banks to pay a 20 percent deposit on forward sales of foreign exchange, saying the measure was aimed to curb speculative currency sales. A forward sale is a commitment to sell at a predetermined price and date.

However, POBC denied in a statement the move amounted to a capital control as it did not restrict transaction volumes and did not require approval for individual transactions.

Following the news, the yuan closed 0.16 percent lower against the dollar at 6.3778 on Wednesday. On Thursday, the central bank set its daily rate for the yuan 0.22 percent lower from the previous day's fix at 6.3772 to the dollar.

uhe/cjc (AFP, FT, Bloomberg)