China’s central bank will restrict cross-border renminbi transfers, according to a document obtained by the Financial Times, in a move that will help stem capital outflows but hinder Beijing’s efforts to internationalise its currency.
Restrictions on international renminbi payments are the latest in a string of capital control measures 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.
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 the document. Previously, there was no limit on the value of such transfers as long as they were for an approved purpose.
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. Cross-border renminbi payments out of the country hit a record high of Rmb1.7tn in the third quarter against only Rmb970bn in inflows, according to central bank data.
“All these measures are taken in order to strengthen control over capital outflow, in order to check people’s growing expectation 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.”
Previous measures focused on tightening approvals for converting renminbi to dollars in China’s onshore market, then transferring those dollars abroad. China’s foreign exchange regulator has given oral guidance to foreign banks in recent days instructing them to apply for permission to buy foreign exchange on behalf of corporate clients for the purpose of making dividend payments or repaying shareholder loans, sources familiar with the matter told the FT.
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 its 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 to 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 just part of the continued monitoring of the channels and the more stringent documentation requirements. The barriers just keep going up,” said a foreign exchange strategist in Hong Kong.
Twitter: @gabrielwildau
Additional reporting by Ma Nan, Wan Li, Lucy Hornby and Jennifer Hughes
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