Across The Border

China tells banks to scrutinise reasons for large capital outflows

Money leaving China faster than ever, with net outbound yuan payments totaling 1.8 trillion in the year to date, while offshore yuan deposits declined by 255.7bn

PUBLISHED : Tuesday, 29 November, 2016, 3:23pm
UPDATED : Tuesday, 29 November, 2016, 10:22pm

The Chinese authorities are stepping up their monitoring of yuan outflow, in addition to tightening up scrutiny of overseas investments, in an attempt to curb the sharp depreciation of the currency since October.

Net outbound yuan payments have totaled 1.8 trillion in the year to date, while offshore yuan deposits declined by 255.7 billion yuan, according to new data compiled by Wind Information and China International Capital Corporation (CICC).

“This suggests RMB outflows may have become a way for Chinese companies to circumvent foreign exchange (FX) controls, by moving capital across borders, and converting it into foreign exchange denominated assets offshore,” the note said.

“Offshore RMB lending to finance Chinese companies’ overseas investment has become a key channel for RMB outflows, as have dividend payments and profit repatriation,” the note said.

“Different levels of restriction over RMB and foreign exchange capital activities may have attracted regulatory arbitrage, and resulted in an the acceleration of RMB outflows.

“China may well incorporate RMB outflows into a unified macro-prudential regulatory framework for cross-border capital flow [in future] if the currency pressure heightens,” it added.

Some commercial banks have already been receiving guidance from the People’s Bank of China (PBOC), the central bank, on how to tighten their capital account controls, particularly when dealing with items involving overseas direct investment.

“In the past, any outflow below one billion yuan could be settled before reporting to the State Administration of Foreign Exchange (SAFE). But starting today, all outflow above 500 million yuan needs the signature of a local deputy branch manager,” one banker with a Shanghai based state-owned commercial bank told the Post, asking not to be named.

China’s foreign investment ‘shopping spree’ over as Beijing moves to slash capital outflow

“The order we received is to strictly verify the source of capital and the purpose for overseas usage, to make sure the outflow is reasonable, and in accordance with rules and law,” she said.

The yuan has fallen over 6 per cent against the US dollar this year, dropping around 2 per cent since the unexpected victory of Donald Trump in the US election, leaving it at an eight and a half year low against the greenback.

China’s foreign currency reserves have fallen to their lowest since March 2011 to US$ 3.12 trillion by the end of October, with the PBOC widely believed to have sold US dollars to cushion the currency’s decline.

In a bid to prevent continued sharp falls in the yuan, while at the same time halting the ongoing drain of the country’s foreign exchange reserves, the government has enacted a string of measures, mainly blocking the outflow channels, including banning Chinese customers from buying overseas insurance products other than accident and medical-related policies.

The Wall Street Journal on Friday reported on Friday that China planed to tighten controls on companies looking to invest abroad.

Targeted for particular scrutiny by the pending measures are “extra-large” foreign acquisitions valued at US$10 billion or more per deal, property investments by state-owned firms above US$1 billion and investments of US$1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.

The depreciation pressure on the yuan should ease as outflows taper, but that may only work temporarily
Aidan Yao, senior emerging Asia economist, AXA Investment

According to a statement from Xinhua, four national authorities – the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOC), PBOC, and SAFE – have made a joint that China is still promoting healthy outbound investment, but “will verify some overseas investment projects”, according to rules.

Aidan Yao, senior emerging Asia economist at AXA Investment, said: “The tightening is meant to curb overseas investment using high leverage, or targets that are unrelated to the acquirer’s core business, or those that are disguised capital flight.

“The depreciation pressure on the yuan should ease as outflows taper, but that may only work temporarily,” he said, adding in the short term, the movement of yuan is still largely dependent on the US dollar’s momentum.

China’s investment in private sector organisations remains low, at 27.7 per cent of GDP as of June, compared with 133.8 per cent of GDP for the US, and 161 per cent of GDP for Japan, according to the CICC note.

“The rise of Chinese overseas investment is a long-term trend, but it should be a gradual process,” it said.

“It takes time for Chinese companies to learn and adapt to local cultures, ethical practises, regulatory standards... Leveraged deals that are not motivated by real investment opportunities but intrinsically one-way bets against the RMB may have to pay high “learning costs” when things turn unfavourable.”