Beijing has stepped up efforts to crack down on foreign exchange speculation, urging banks to monitor "abnormal" transactions, according to financial industry sources, which could lead to a slowdown or freezing of cross-border fund transfers. Banks have been told to set up watch lists for transactions in which US$200,000 or more in foreign currencies has been bought by five different individuals on the same day, every two days, or on consecutive days and transferred to the same overseas individual or institution over the past 90 trading days. Those on the watch lists face a freeze of the daily foreign exchange settlement quota of US$50,000, according to sources who have received documents from the State Administration of Foreign Exchange. "Banks are also urged to conduct self checks on abnormal cross-border fund flows, increase authenticity checks on the identities of applicants who wish to sell or buy foreign currency for cross-border trade services, as well as importers who remit prepayment to overseas suppliers," said one source who has seen the document. The new measures are Beijing's latest bid to stem currency arbitrage and capital outflows after the central bank devalued the yuan by almost 2 per cent a month ago. Ten days ago, the central bank also asked banks to submit 20 per cent of the sales of currency forward trading as a reserve requirement. "The instructions could temporarily stabilise the situation. But it is extremely difficult to rein in cross-border fund flows as China has already opened up the current account," the source added. The 20 per cent requirement was not an attempt at capital control, but was designed to root out speculative trading, the People's Bank of China said in a statement on Tuesday night. "The August turnover of banks trading forwards on behalf of clients was three times that of the monthly average between January and July, which means there were speculations involved," the central bank said. It also acknowledged on Tuesday it had been propping up liquidity in the foreign exchange market, which contributed to the record monthly fall in the official reserve assets in August. Kevin Lai, Asia ex-Japan chief economist at Daiwa Capital Markets, said capital was leaving China. "The authorities want to shut the floodgate," he said. "We've seen half a trillion US dollars outflow in the last 12 months through the capital account, exerting a great deal of pressure on the central bank's balance sheet, hugely deflationary and recessionary. "[The curbs] are bad news for everyone. Somebody, the banks or whoever lent out the money to carry traders, will take a hit." Carry traders profit from borrowing low-yielding currencies and lending high-yielding ones.