China puts forex markets under microscope as yuan rallies and capital outflow pose ‘major risks’

Domestic economic slowdown and tensions with the West threaten to reduce China’s attractiveness to foreign investors and trigger an exodus of hot money

State forex regulator reiterates the importance of ensuring the safety, liquidity and value of China’s US$3.2 trillion worth of forex reserves

3-MIN READ3-MIN

Beijing remains on high alert for problems in its forex markets that could spark financial and economic volatility. Photo: AP

Published: 10:15pm, 14 Dec 2021Updated: 11:56pm, 14 Dec 2021

China’s financial regulators have vowed to better supervise foreign exchange markets while taking a “zero-tolerance” approach to illegal transactions, as the yuan’s exchange rate has recently seen an unusual rally against the US dollar.

Meanwhile, the world’s second-largest economy intends to implement a fast-track mechanism for Olympics-related demand, particularly for foreign visitors and athletes, according to official online statements.

The State Administration of Foreign Exchange (SAFE) has deemed “stability” the top priority for 2022, matching the tone taken at last week’s central economic work conference.

“[We will] improve the ‘macro-prudential’ and ‘micro-supervision’ framework in foreign exchange markets, prevent major risks, and safeguard national economic and financial security,” the regulator said during a meeting on Monday.

Beijing had already been on high alert for unfavourable factors in its forex markets, while taking several steps to curb capital outflows as Washington tapers off the monetary stimulus that it has been providing for the US economy.

There are concerns that the domestic economic slowdown and tensions with major Western countries could reduce China’s attractiveness to foreign investors and trigger outflows of hot money that entered China via a variety of channels in the past several years.

A reversal of capital flows, which also occurred amid the United States’ last exit from quantitative easing, heaps considerable pressure on currency and can result in financial volatility.