A shop assistant displays a gold dragon pendant in Qingdao, Shandong province. Gold importers have faced difficulty recently getting import approval © AFP
The Chinese government intensified its efforts to stem capital flight from the world’s second-largest economy on Thursday, as it simultaneously moved to slow renminbi outflows and restrict gold imports.
Curbs on international renminbi payments and gold imports are the latest in a string of capital control measures intended to relieve downward pressure on the currency and protect dwindling foreign exchange reserves. Days earlier, China’s cabinet circulated draft rules restricting large foreign acquisitions, while its foreign exchange regulator began to vet outward remittances as low as $5m, compared with a previous threshold of $50m.
The People’s Bank of China will restrict net renminbi transfers by China-domiciled companies to 30 per cent of shareholder’s equity, according to a document seen by the Financial Times. Previously, there was no limit on the value of such transfers, which were encouraged by Beijing as part of its larger effort to internationalise the renminbi.
Cross-border renminbi payments out of the country hit a record high of Rmb1.7tn ($246.7bn) in the third quarter against only Rmb970bn in inflows, according to central bank data. Authorities previously took a more permissive approach towards renminbi outflows because the accumulation of the currency offshore allows its use for trade and investment outside China’s borders.
In a parallel measure, bankers and traders told the Financial Times that some gold importers have had difficulty obtaining approval to bring in gold as the weakening renminbi raises Chinese investors’ interest in the metal.
The renminbi has slipped 5.8 per cent against the greenback this year, putting it on track for its biggest annual decline on record.
“All these measures are taken in order to strengthen control over capital outflows and check growing expectations for renminbi depreciation,” said Wang Jun, economist at the China Center for International Economic Exchange in Beijing. “Under the circumstances, it’s the only option. We’re losing a lot of foreign reserves.”
After reaching almost $4tn in early 2014, Beijing’s forex reserves have fallen about 25 per cent. One Beijing-based money manager said the authorities were “putting all of their fingers in the dam”. “My sense is that they are going line-by-line to reduce outflows,” added a Hong Kong currency strategist.
China imported about 905 tonnes of gold in the first nine months of this year, according to export data from Hong Kong, Switzerland, Australia and the UK. Much of that is normally re-exported as jewellery.
In 2013 three foreign banks — HSBC, Standard Chartered and ANZ — were awarded licences to import gold, which the government controls via the quarterly quota system. A year later, the PBoC allowed the Shanghai Gold Exchange to set up an international board to open the market to foreign investors.
This year the SGE also launched a daily gold-pricing auction, similar to the process run in London between banks. “It’s like one step forward and three steps backwards,” one international banker said about the latest import restrictions.
Chinese capital control measures have traditionally focused on tightening approvals for converting renminbi to dollars in China’s onshore market, then transferring those dollars abroad.
The State Administration for Foreign Exchange has given oral guidance to foreign banks in recent days, instructing them to apply for permission to buy foreign exchange for corporate clients needing to make dividend payments or repay shareholder loans, according to people familiar with the instructions.
But the latest move by the PBoC concerns cross-border renminbi remittance. Once renminbi exits mainland China into the offshore market — which has emerged since 2010 as China has pushed to internationalise the currency — conversion to foreign exchange is unregulated.
The new curbs on outflows are likely to deal a further blow to the offshore renminbi market, where liquidity has already been tightening. Renminbi deposits in Hong Kong, Singapore, Korea and Taiwan fell 30 per cent between August 2015 and the end of September this year, according to data tracked by HSBC.
When investors or companies resort to the offshore market to sell renminbi for dollars, it does not immediately trigger foreign-currency outflows from the mainland. But it does create indirect outflow pressure.
Heavy offshore renminbi selling can cause divergence between the onshore and offshore exchange rates. But the gap between two exchange rates eventually narrows due to arbitrage by banks and companies with access to both markets. These transactions involve transferring US dollars out of the onshore market.
“It’s part of the continued monitoring of the channels and the more stringent documentation requirements,” said a second foreign exchange strategist in Hong Kong. “The barriers just keep going up,”
Twitter: @gabrielwildau
Additional reporting by Ma Nan, Wan Li, Lucy Hornby and Jennifer Hughes
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