Photographer: Qilai Shen/Bloomberg

China's Investors Get Creative About Capital Controls

  • PBOC trying to tighten rules as pressure significant: Mizuho
  • Credit card company limits transactions, Bitcoin curbs seen

China’s policy makers are playing catch-up as investors get more creative in evading capital controls.

The authorities are taking a series of steps to plug loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country, as well as a statement from UnionPay Co. limiting mainlanders from using its cards to buy insurance in Hong Kong. These add to more traditional measures, including an order seen as asking mainland banks to reduce foreign-exchange sales.

QuickTake The People's Currency

These measures, all reported in the past two weeks, follow a period during which Chinese officials and state media stepped up efforts to talk up the yuan even as the currency fell to six-year lows at home and overseas. While the exchange rate received some relief last week as the dollar dropped on concern over the U.S. presidential election, the onshore yuan is still down about 4.2 percent for the year in Asia’s worst performance. The nation’s foreign-exchange reserves plunged $45.7 billion in October, the most since January, according to data released Monday.

“The People’s Bank of China is doing this now because data show capital outflow pressures remain significant and there are no signs of a reversal,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “It looks like the government will block outflow channels as and when they find them. This will slow the yuan’s internationalization and discourage foreign investment due to concern money will get locked up once invested.”

The yuan’s accelerated declines -- it fell 1.53 percent last month in the biggest drop since a surprise devaluation in August last year -- have worsened outflow pressures. This has prompted investors to find innovative ways to move their wealth overseas by bypassing a range of curbs set in place after the devaluation. The PBOC didn’t reply to two faxes seeking comment.

A record $44.7 billion left the nation in September in yuan payments rather than in foreign exchange, official data show. Also, regulators have recently noticed that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, according to people familiar with the matter.

Mainland investors have flocked to Hong Kong to buy insurance policies, which offer a way to skirt money controls. A Bloomberg News report in March this year cited an example from Hong Kong insurance agent Raymond Ng, who said he swiped the credit cards of a mainland Chinese client 800 times for the purchase of HK$28 million ($3.6 million) of insurance policies.

Chinese firms have also accelerated overseas acquisitions, with spending on international acquisitions and investments reaching $222.8 billion so far this year, more than double last year’s amount.

Hong Kong Property

A recent favored target has been Hong Kong property. HNA Group Co. paid HK$8.84 billion for government land in the former Kai Tak airport area, the highest price tag in three-and-a-half years, while Evergrande Real Estate Group Ltd. and China Life Insurance Co. bought Hong Kong office blocks in separate transactions worth a combined HK$18.35 billion to break previous price records. A Chinese buyer is set to buy The Center building in Hong Kong’s Central district for HK$35.7 billion, according to a Hong Kong Economic Journal report.

Hong Kong on Friday doubled a stamp duty for foreigners’ purchases of homes to 30 percent.

“There is a lot of fear outside of China about outflows,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “The issue has always been that outflows will happen as the capital account is opened. China knows this and has said it, but it needs to be done in a manner which is not disorderly.”

Yuan Decline

The yuan dropped to a record low of 93.71 against a trade-weighted currency basket on Tuesday. This was a surprise for market watchers, with a Bloomberg survey of 21 analysts and traders last month predicting that the PBOC will keep the gauge at 94 the rest of this year.

The onshore yuan was trading at 6.7823 a dollar late Tuesday, near the year-end median estimate of 6.79 in another survey. China will step up monitoring of cross-border fund flows and continue to crack down on illegal foreign-exchange activities, the State Administration of Foreign Exchange said Friday.

“Stricter controls could theoretically end up in something like a self-fulfilling prophecy,” said Frederik Kunze, chief China economist at Norddeutsche Landesbank in Hanover, Germany. “Market participants on the mainland might become anxious with regard to the future yuan outlook. In our baseline scenario a significant but not dramatic depreciation of the yuan has to be expected.”

— With assistance by Robin Ganguly, Tian Chen, and Helen Sun

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