China Said to Curb Foreign-Exchange Buying Under Current Account

  • Funds can be converted a maximum five days before payments due
  • Capital controls are being strengthened to stem outflows

China stepped up efforts to prevent companies from dumping yuan by restricting the timeframe for foreign-exchange purchases to pay for imports.

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, according to people familiar with the matter who cited the State Administration of Foreign Exchange’s instructions to lenders in some regions. The new rule comes at a time when China is increasingly resorting to administrative measures to damp depreciation pressures on the yuan and stem record capital outflows.

"The move aims to limit large-scale foreign-currency purchases as the market still expects the yuan will decline and will hurt companies with genuine demand for the dollar," said Zhou Hao, an economist at Commerzbank AG in Singapore. "But the policy makers’ top priority now is to stabilize the market with such measures, which will likely remain in pace in the near term."

Chinese banks sold a net 568.3 billion yuan ($86 billion) of overseas currencies to their clients in December, SAFE said on its website last week. That’s a sixth consecutive month of net selling and more than twice the amount in November. The data suggest onshore companies and individuals are hoarding dollars as speculation builds the yuan will weaken further after posting the biggest annual drop in more than two decades in 2015, according to Commonwealth Bank of Australia.

An estimated $550 billion yuan of funds left China since mid-2015, with some 60 percent of this stemming from Chinese residents’ accumulation of overseas assets, Goldman Sachs Group Inc. economists led by MK Tang wrote in a note this week. Bloomberg Intelligence estimates that about $1 trillion of capital fled last year, underscoring the scale of the battle facing policy makers as they struggle to boost an economy growing at the slowest pace since 1990.

Yu Yongding, a former member of the central bank’s monetary policy committee, said Wednesday that capital controls should be strengthened. The nation has increased scrutiny of funds being transferred overseas and curbed the offshore supply of the yuan to make betting on the currency’s declines more expensive.

— With assistance by Tian Chen, Ran Li, and Alfred Cang

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