China eases yuan outflow controls in sign of recovered confidence

Central bank has relaxed policy on banks processing cross-border yuan payments

PUBLISHED : Wednesday, 19 April, 2017, 9:29am
UPDATED : Wednesday, 19 April, 2017, 10:48pm

China has taken a small step to relax its controls over yuan outflows, sources told the South China Morning Post, reflecting that Beijing is seeing a smaller risk of capital exodus and greater market confidence in the value of the yuan.

The People’s Bank of China in early January required commercial banks to stop processing cross-border yuan payments unless the banks could show at the end of every month that the amount of outbound yuan matched the sum that came in, but that restriction was scrapped from last Wednesday, said mainland banking sources who were briefed on the policy change.

After the policy relaxation, banks can now freely process outbound yuan payment and remittance requests from their corporate and individual clients, a move that is expected to help boost liquidity in offshore yuan markets, especially Hong Kong.

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The earlier yuan settlement restriction imposed in January prevented some banks from transferring profits made by foreign companies based in China overseas if the lenders did not have a surplus of yuan payments coming into the country, a Shanghai banking source said, adding that the relaxation would help restore such business.

While the policy relaxation didn’t cover cross-border foreign exchange flows or big outbound investment deals, especially overseas investments initiated by Chinese companies that don’t relate to their core businesses, it was the first relaxation of outbound capital control in nearly two years, the sources said.

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“While it is too early to say this is a turning point, we believe this at least shows that China is still keen to push forward with yuan internationalisation,” said Zhou Hao, an economist at Commerzbank AG in Singapore.

“In my opinion it will help ease the liquidity conditions in the offshore yuan (CNH) market in the foreseeable future,” he added.

Chen Long, China economist at Gavekal Dragonomics, said: “China still saw net yuan outflow in recent months, although the size abated from that of late 2016, based on figures released by the foreign exchange authority. Future policies will depend on how capital flow changes over time.”

The worst period for China’s capital flight and yuan depreciation appears to have passed after China’s foreign exchange reserves, a barometer of capital flows, increased in March for the second consecutive month.

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The yuan’s exchange rate against the dollar has been stabilising, if not strengthening, in recent trading sessions, especially after US President Donald Trump said last week that the US dollar was too strong.

Chinese Premier Li Keqiang said in comments published on Tuesday that market confidence in the yuan had “significantly improved”.

Chinese exports also surged 16.4 per cent in US dollar terms, generating US$24 billion in March, as Trump has muted his trade war threats against China.

China imposed capital account measures in late 2016 to curb money outflows, but the measures are widely viewed as counterproductive to China’s long-term strategy of boosting the yuan’s global use.

Beijing’s restriction of the use of its currency has suffocated the development of offshore yuan markets.

Yuan deposits in Hong Kong at the end of 2016 dropped 35.8 per cent from a year earlier to 546.7 billion yuan (US$79.4 billion), but banks in Hong Kong have started to seek yuan deposits again in recent weeks as the yuan exchange rate has stabilised.