Here's What China Is Doing to Tighten Noose on Capital Flows

Updated on
  • Offshore supply of yuan restricted to make shorting costlier
  • Outbound investment quotas frozen as Tobin tax mooted

China's Economic Transformation: Beyond the Numbers

China is increasingly resorting to administrative measures to curb capital outflows and calls are mounting for further restrictions as the defense of the yuan burns through the nation’s foreign-exchange reserves.

The tightening of controls marks a reversal after years of easing that spurred global usage of the yuan and secured reserve status for the currency at the International Monetary Fund. The yuan has retreated 2.7 percent since the IMF decision was announced at the end of November, even as intervention to support the currency led to an unprecedented $108 billion drop in China’s reserves last month.

Bank of Japan Governor Haruhiko Kuroda called over the weekend for Chinese policy makers to clamp down on capital flows and Yu Yongding, a former member of the People’s Bank of China’s monetary policy committee, said Wednesday that controls should be strengthened. Here’s what’s been done so far to slow the record exodus of funds that drove the yuan to a five-year low and options that have been raised for consideration:

Recent Measures

* Increased scrutiny of transfers overseas -- Some Shanghai banks have recently asked their outlets to closely check whether individuals sent money abroad by breaking up foreign-currency purchases into smaller transactions and to take punitive action if violations were discovered, according to people familiar with the matter. Each person can send $50,000 abroad annually and so large sums can be transferred by utilizing the bank accounts and quotas of a range of individuals, a tactic known as smurfing.

* Curbing the offshore supply of yuan to make shorting costlier -- The PBOC told some onshore lenders to stop offering cross-border financing to offshore counterparts late last year, and on Jan. 11 advisedsome Chinese banks’ units in Hong Kong to suspend offshore yuan lending unless necessary. It’s also widened the scope of reserve requirements to include some yuan holdings of overseas financial institutions.

* Restricting companies’ foreign-exchange purchases -- Companies can only buy overseas currencies a maximum five days before they make actual payments for goods, having previously been free to make their own decisions on timing.

* Suspension of foreign banks -- DBS Group Holdings Ltd. and Standard Chartered Plc were among overseas banks suspended from conducting some foreign-exchange business in China until the end of March. The bans included the settlement of offshore clients’ yuan transactions in the onshore market and was introduced as a widening gap between the currency’s exchange rates in Shanghai and Hong Kong encouraged arbitrage trades.

* Outbound investment quotas frozen -- China has suspended new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the currency. It has also refrained from granting new quotas for residents to invest in overseas markets via its Qualified Domestic Institutional Investor program since March.

* Delaying the Shenzhen stocks link -- China originally planned to start a link between the Shenzhen market and the Hong Kong bourse last year, but the plan was delayed amid a mainland equities rout.

* UnionPay debit-card clampdown -- New measures were introduced in December to crack down on illegal China UnionPay Co. card machines, which were suspected of being used to channel funds offshore via fake transactions, most notably in Macau casinos.

* Underground banking clampdown -- China busted the nation’s biggest "underground bank," which handled 410 billion yuan ($62 billion) of illegal foreign-exchange transactions, the official People’s Daily reported in November. The Shanghai branch of the SAFE said last week that it will crack down on illegal currency transactions, including underground banking.


* Tobin tax -- Chinese officials mentioned the possibility of taxing foreign-exchange transactions -- a so-called Tobin Tax -- to reduce volatility at least twice in October. PBOC Deputy Governor Yi Gang said the move could counter short-term capital flows that aim for arbitrage.

* Muddle through -- China could continue with the current mix of verbal support, onshore and offshore intervention, and dialing back capital-account opening. The PBOC is considering new measures to prevent high volatility in the exchange rate in the short term, and will continue direct intervention in the currency market, people familiar with the matter said this month, without disclosing which specific tools were being discussed.

* Devalue -- China will probably have to devalue its currency to combat slowing economic growth, Goldman Sachs Group Inc. President Gary Cohn said this month at the World Economic Forum in Davos, Switzerland. His comments came a day after Chinese Vice President Li Yuanchao said that the government has no intention and no policy to devalue the yuan.

* Free float -- China will seek to increase the yuan’s convertibility in an orderly manner in the next five years, by changing the way it manages currency policy and opening up the finance industry, according to the Communist Party’s next five-year plan. Policy makers were preparing to announce a 2020 deadline to dismantle currency controls, according to people familiar with the plans.

* Limit repatriation of earnings -- Policy makers are seeking to restrict the access for international companies to repatriate their earnings made in China, the Wall Street Journal reported Wednesday, citing people familiar with the matter. State Administration of Foreign Exchange denied this was the case, saying profits can be sent overseas provided banks review the transfers to check for compliance with regulations.