Rules tightened as regulators go public in fight to stem illegal hard currency outflows

China has pledged to step up its crackdown on foreign-exchange smuggling to stem a rise in capital flight that has sent its stock markets in a tailspin.

This is the first time foreign-exchange regulators have gone public in their fight against illegal hard currency outflows.

In yesterday's China Securities newspaper, a senior unnamed official of the State Administration of Foreign Exchange (SAFE) was quoted as saying that authorities would severely punish those who attempt to take foreign currency out of the country illegally.

The newspaper report said the government would tighten control on bank withdrawals of more than US$10,000, which require approval from SAFE. Chinese tourists travelling abroad are entitled to buy up to US$2,000 in hard currency.

The report said any amount beyond that required a permit from banks, however, authorities had discovered irregularities which 'disrupted the normal order of foreign exchange management'.

Beijing's concern is understandable given that the capital flight has made its way as hot money into Hong Kong markets at the expense of draining funds from ailing B-share markets.

'B-share markets cannot afford to be messed up,' said an analyst at the research department of the Shanghai-based China Foreign Exchange Trading System.