China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising, stepping up efforts to curb hot-money inflows that may inflate asset bubbles and add pressure for a stronger yuan.
The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks’ foreign-debt quotas, the regulator said in a statement on its website today. The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.
The measures underscore concern around the world that the U.S. Federal Reserve’s expanded monetary stimulus will cause capital to flood into emerging markets. The yuan rose today by the most since the end of a dollar peg in 2005 as global leaders prepare to discuss currency tensions and the impact of the Fed’s easing at the Group of 20 summit this week in Seoul.
“Some international funds will flee from dollar assets because of the Fed’s easing, and China’s SAFE is trying all means to plug loopholes in possible channels for hot-money inflows,” said Zhao Qingming, a senior analyst at China Construction Bank Corp. in Beijing, the country’s second-largest lender.
The yuan jumped 0.51 percent to 6.6440 per dollar as of 6:08 p.m. in Shanghai, bringing gains this year to 2.7 percent, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards were at 6.4463, reflecting bets the currency will strengthen 3 percent in one year.
Also today, Taiwan’s Financial Supervisory Commission said it will restore curbs on foreign investments in fixed-income securities to include government debt due in more than a year. Capital inflows from overseas helped pushed the Taiwan dollar up the most in more than a decade yesterday.
China’s regulator said that a bank’s daily net dollar positions, in expired forward contracts and spot greenback holdings, should not be less than yesterday’s levels. Forcing banks to keep hold of U.S. currency will limit their ability to meet orders for yuan purchases, restricting the amount that can flow into local-currency assets.
“This is to ask banks to hold more foreign currency to help ease pressure on the growing size of China’s foreign-exchange reserves,” Zhao said. “To some extent, it can help limit yuan gains in the short term.”
The People’s Bank of China reported a record $100 billion jump in its foreign-exchange reserves to $2.65 trillion for September. China’s foreign debt totaled $513.8 billion at the end of June, including $343.8 billion of short-term debt, according to SAFE data.
Officials from China to Germany have criticized the Federal Reserve’s plan to pump $600 billion into the economy by buying Treasuries, saying the plan will weaken the dollar and risks escalating flows of speculative capital to emerging markets.
The world needs a stable dollar, Dai Xianglong, chairman of China’s National Council for Social Security Fund and a former head of the nation’s central bank, said today at a forum in Beijing. The Fed is “risking the fragile global recovery by following its own track for economic revival,” the state-run Xinhua News Agency said in a commentary.
The Fed’s plan may “shock” emerging markets by flooding them with capital, Chinese Vice Finance Minister Zhu Guangyao said yesterday.
The rules are aimed at “further curbing inflows and settlement of non-compliant funds,” the foreign exchange regulator said today. They are designed to “maintain China’s economic and financial security,” it said.
China’s capital controls can block abnormal inflows of money, central bank Governor Zhou Xiaochuan said at a forum in Beijing last week.
“The strengthened controls on hot money can’t change the yuan’s trend of appreciation,” said Isaac Meng, an economist at BNP Paribas SA in Beijing. “The yuan will continue to appreciate as the Fed easing prompts more capital inflows and China’s economy grows faster than the U.S.”