China Further Tightens Scrutiny On Foreign Exchange Transactions

China is taking additional steps to tighten foreign currency outflows from the country as the start of the new year resets individual currency purchase limits within the country. An announcement was made ahead of the new year by the country’s State Administration of Foreign Exchange (SAFE) who has asked banks to improve their processes for verifying customer details and to report all large or dubious transactions.

The department has pointed out that leaks are occurring in the current system wherein monetary transfers are being carried out under the guise of goods transactions and circumventing capital control restrictions.

Under the new measures applicable from January 1 onwards, Chinese residents would need to file an application with reasons for their foreign exchange purchases among other information.

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This is expected to enable better tracking of currency movements in the country. SAFE has said that it will be examining such information more closely in the coming months according to a recent statement. This move will plug loopholes in earlier processes where purchases could use money under current accounts to purchase land and other investment products, facilitating money laundering and illegal transfers of capital.

Any individual caught breaking rules would be put on a watch list and might be banned from carrying out foreign currency transactions. Credit scoring records will also reflect such activities. SAFE has warned against holding foreign currency blindly highlighting the volatility in global markets.

In a statement, SAFE said,

Currently, interest rates in major developed economies are at a low level. In addition, the international forex market is volatile, but the yuan’s effective exchange rate is basically stable, and the currency fluctuates sideways against the US dollar. So holding foreign currency assets carries big uncertainty and risks.

China’s currency controls restrict individual purchases of foreign currency to $50,000 per calendar year. With the limit getting reset on January 1, the Chinese government is concerned about increased pressure on the yuan.

The yuan has seen the highest-ever drop in its value against the dollar in 2016, falling by around 7 percent. The People’s Bank of China (PBOC) which is the country’s central bank is aiming to ensure that the yuan remains above the psychological limit of RMB 7 per dollar. The onshore renminbi is currently hovering in the range of RMB 6.94 to the dollar

Additionally, the central bank is aiming to safeguard the country’s foreign exchange reserves. With its reserves declining by $200 billion last year, China wants to make sure that it doesn’t fall below the $3 trillion mark. The PBOC has been burning through foreign exchange reserves in 2016 in a bid to contain the yuan’s depreciation.

Charlie Harrison

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