China Restricting Outbound Payments: A Total Ban Next?

06-Dec-2016 Intellasia | Forbes | 6:00 AM Print This Post

Friday, China’s large state banks sold dollars for a fifth-straight day to counter corporates dumping renminbi.

The Chinese currency is in long-term decline, falling 5.95 percent against the greenback in the onshore market since the end of 2015. Last week, the yuan closed at 6.8800 to the dollar, near the eight-year low.

The sustained drop in the currency – it has been falling against the dollar almost continuously since the beginning of 2014 – has led to large outbound transfers of cash. Last year, there was perhaps as much as a trillion dollars of net capital outflow.

This year, the outflow will probably be close to that of 2015. It appears that outbound transfers, legal and surreptitious, picked up as the year progressed.

As Paul Gruenwald of S&P Global told Bloomberg, there are three options to stem capital outflow: impose capital controls, use forex reserves to defend the currency, or allow currency depreciation.

Beijing has employed all three methods in recent months, but in the past three weeks it has emphasized the imposition of new controls.

Measures adopted or revealed in the last weeks indicates a high level of concern in the Chinese capital. A circular issued by the People’s Bank of China on November 26 prohibits a domestic non-financial enterprise from lending more than 30 percent of its equity to a foreign company in renminbi.

The South China Morning Post reports that the New York branch of the Industrial and Commercial Bank of China has already blocked two payments because of the new rule.

In addition, on November 28 the Shanghai branch of the State Administration of Foreign Exchange, the forex regulator, began requiring approval for payments exceeding $5 million for the purposes of cross-border acquisitions.

There is also new scrutiny of cross-border deals. Authorities, it has been reported, are looking at acquisitions of foreign companies for $1 billion or more if the potential target is not in the same business as the acquirer.

The Australian Financial Review notes that regulatory review is especially tight if a state firm plans a major real estate buy.

Beijing is also showing desperation by extending the crackdown to foreign companies, which had been largely immune to tightened currency restrictions. Now, however, Chinese forex regulators have ordered banks to limit their outbound transfers. “Until this week, it was possible for big companies to ‘sweep’ $50 million worth of yuan or dollars in or out of China with minimal documentation,” reported the Wall Street Journal, referring to popular sweeping programmes allowed in Shanghai’s free-trade zone since the middle of 2013. “Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations.”

Apparently, American multinationals had been moving cash out of China to take advantage of Donald Trump’s anticipated US tax amnesty for offshore funds.

But there are other reasons for companies to take money out of the country. “It’s possible too, that anticipation of tighter capital controls in the future has nudged the treasury operations of multinational companies to move more money out of China,” said Ker Gibbs, chair of the American Chamber of Commerce in Shanghai, to the Journal.

Not surprisingly, large domestic enterprises face the same restrictions on sweeping.

The raft of new restrictions, many believe, are only temporary. Various publications report that the recently imposed controls will be kept in place only until next September, on the eve of the 19th Communist Party Congress.

Yet that timeframe seems optimistic because the Party is not going to want to risk triggering a crisis by relaxing controls on the eve of the gathering. Then, Xi Jinping, the current supremo, is expected to cement his control of the Politburo Standing Committee, the highest body in the ruling organisation.

If anything, Beijing’s new rules will last longer and only get tighter. “Given the Chinese government’s consistent preference for control, we may see much more draconian capital controls before a decision to float the currency can be made,” Victor Shih of the University of California at San Diego told Bloomberg.

Controls, of course, have a logic of their own. Once authorities impose restrictions, owners of wealth export capital. Then, authorities tighten the rules. Tightening only encourages people to send out even more capital. As Frederik Kunze of Norddeutsche Landesbank notes, “Stricter controls could theoretically end up something like a self-fulfilling prophesy.”

Beijing, however, faces a practical problem as it duels with capital exporters. “Banks in Beijing told me in August that any use of foreign exchange above 10 million Rmb required a personal visit to SAFE,” Andrew Collier of Orient Capital Research in Hong Kong pointed out to me and others last week. “But they agreed that SAFE doesn’t have the manpower to do this and it would be another fairly empty rule. More recently, I heard that the National Development and Reform Commission is getting so flooded with requests for approvals on overseas transactions that they have set a threshold below which local NDRCs can sign off, avoiding a traffic jam at headquarters in Beijing.” As Collier suggests, restrictions are difficult to administer.

A total ban on outbound payments, however, would be much easier to enforce.

So the forecast is a 100 percent chance of more capital controls with a possibility of a complete ban on outbound transfers except for payments by manufacturers for raw materials.

Inconceivable? A ban of this sort would be the absolute last resort, but the situation has deteriorated so much that Chinese technocrats have almost no other viable options. Incremental approaches don’t work when owners of wealth decide they have had enough, so authorities have reason to adopt exceedingly strict rules.

Half-measures, Chinese leaders are finding out, only exacerbate the situation. They have no choice but to shut the doors.


Category: China

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