China ‘stuck’ as rigid controls on capital outflows becoming harder to peel back

China imposes a strict capital account system to control the yuan exchange rate, its international balance sheet and the size of foreign exchange reserves

But the regime comes with risks, analysts say, including distorting supply and demand in the foreign exchange market and restricting investment in some areas

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China imposes strict controls to stem capital outflows and stabilise the yuan. Photo: AP

Published: 5:00am, 26 Aug 2020Updated: 5:49am, 26 Aug 2020

China’s onerous capital account controls were all too apparent for Oziter Mao during a recent trip to a state bank.

“It was so troublesome to transfer just a few thousand yuan out of China to Australia,” complained the mainland resident, who is preparing to travel overseas. “You need to pay a three per cent ‘administrative fee’, and there are requirements for the documents.”

The complaints from Mao are not uncommon for Chinese residents who want to make overseas payments. China’s foreign exchange authorities make it difficult to do so as part of a sophisticated system used to maintain control of the yuan’s exchange rate, the nation’s international balance sheet and the size of foreign exchange reserves.

Every Chinese individual is entitled to buy US$50,000 worth of foreign currencies per year, but capital controls have been tightened in recent years through operational details, new documentation to prove the purpose of exchange, and ad hoc reasons to reject large-scale transactions.

Yu Yongding, one of China’s most prominent economists, said last May that he had tried to buy US$20,000 and remit the funds abroad, but was rejected by his bank because he was above 65 years old – a policy that does not officially exist.

Capital controls are endorsed by the International Monetary Fund as legitimate measures to stem the exodus of money and a plunge in the value of a currency.

Almost all countries and regions have control measures in place to prevent illegal activities such as money laundering and terrorism financing, and banks across the world are vigilant about processing cross-border payments and foreign currency cash.