China has tightened its capital controls, in a sharpreversal of its market liberalising rhetoric, as itstruggles to contain the fallout from last month’s devaluation of the renminbi.
The August 11 devaluation unleashed turmoil on global stock markets and policy confusionat home, forcing the central bank to spend as much as $200bn to support the renminbi. Theprospect of an interest rate rise in the US has further encouraged capital flight.
The State Administration of Foreign Exchange, the unit of the central bank in charge ofmanaging China’s currency, has in recent days ordered financial institutions to step up checksand strengthen controls on all foreign exchange transactions, according to people familiar withthe matter and an official memo seen by the Financial Times.
Safe has ordered banks and financial institutions to pay particular attention to the practice ofover-invoicing exports, used to disguise large capital outflows. Safe confirmed the existenceof the memo, but declined to comment further.
China has long imposed limits on the amount of foreign exchange that can be bought or soldby individuals and companies but those controls have broken down somewhat in recent yearsas the renminbi has become more widely used around the world.
Wang Tao, chief China economist at UBS, said the government had been expected to tightensome FX controls. But relying on them exclusively to protect the renminbi “will not be viableover the long term and hence is unlikely to be pursued by China’s central bank for long”, sheadded.
The policy reversal comes after China’s central bank drew heavily on its vast foreign exchangereserves to prevent the renminbi falling dramatically against the dollar in the wake of thetechnical devaluation last month. Although still the largest in the world, its reserves fell by thebiggest amount on record in August, dropping $94bn to around $3.56tn.
For the first time since it began internationalising its currency a few years ago, the central bankhas also been intervening heavily in the offshore renminbi market to narrow the gap betweenthe onshore (CNY) and offshore (CNH) exchange rates.
Analysts and people familiar with the matter say Beijing has spent up to $200bn defending thecurrency but the net impact on the reserves is disguised by fluctuating valuations of reserveassets and other inflows into the reserves.
“They have gone from a credible peg that cost them almost nothing to a weak peg thatnobody believes and that is costing them more than $10bn a day to defend — they’re payinghuge sums for something they had for free just a few weeks ago,” said one person with closeties to China’s central bank.