Capital controls the talk of China parliamentarians

Li Keqiang’s annual, 42-page “work report” to China’s parliament is packed with obscure details on matters such as mobile roaming and urban utility tunnels. But one of China’s biggest policy initiatives of 2016 — the reimposition of capital controls — went unmentioned in the premier’s address to the National People’s Congress.

While Mr Li promised to maintain the renminbi’s “stable position in the global monetary system”, there was no reference to the measures that have made it more difficult for Chinese companies, individuals and foreign investors to move money out of the country. 

The Great Hall of the People, however, has been abuzz with talk among Chinese lawmakers about the controversial capital controls. Some criticise the measures as a step backwards for the country’s financial reforms; others praise them as necessary to slow the renminbi’s fall against the dollar and halt the drain on China’s foreign exchange reserves. 

“The biggest bottleneck enterprises encounter is the strict controls on foreign exchange,” Fu Jun, chairman of conglomerate Macrolink, told state media. “After a difficult negotiation to win a high-quality investment project, enterprises are unable to pay due to foreign exchange control payments and ultimately lose out on opportunities for international mergers and acquisitions.” 

Zhang Yichen, head of one of China’s largest investment groups, was quoted by Bloomberg as saying that “it’s a lie” to claim, as many government officials had done, that capital controls had not had any impact on legitimate overseas investments. 

“It’s not too surprising that the premier’s report to the National People’s Congress would skip this topic,” says Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong, “given that the overall theme of national policy in China is to remain open to the outside world. There would be a lot of self-contradiction.” 

In September, the International Monetary Fund formally declared the renminbi a global reserve currency — a long-held dream for economic reformers such as Zhou Xiaochuan, China’s central bank governor. 

President Xi Jinping also positioned China as a defender of globalisation in his January address to the World Economic Forum in Davos, Switzerland. More recently, China has ramped up efforts to promote its own regional trade treaty after former US President Barack Obama’s signature trade deal, the Trans-Pacific Partnership, was killed by his successor, Donald Trump. 

Even those who worry about the threat to Beijing’s reform agenda, however, acknowledge that the controls imposed last year have halted capital outflows, at least temporarily. After eight straight months of decline, China’s foreign exchange reserves rose in February. 

Mr Zhang, despite his complaints about the impact on overseas investment, acknowledged that the controls had helped reduce “the risk of a market crash”. 

One of the biggest supporters of Beijing’s new capital control regime is Yu Yongding, a prominent Beijing economist and member of the Chinese People’s Political Consultative Congress, which meets alongside the NPC.

“The liberalisation of the capital account led to mass capital outflows and put great devaluation pressure on the renminbi,” Mr Yu said in an interview with the Financial Times. “The central bank had to step on the brakes.” 

Other defenders of the measures pointed to some Chinese companies’ proposed acquisition of foreign targets in completely different industries, arguing that such deals were really capital flight in disguise. “You could get away with murder before they started tightening up,” said one person who advises Chinese policymakers. 

“It was a matter of choosing between two evils,” added a senior banker in Beijing. “Speculative acquisitions were destroying the reputation of Chinese companies abroad. They were making it harder for legitimate Chinese companies to do real deals.” 

But even comments supportive of the government’s capital controls have been absent in the state media’s otherwise copious reporting on the NPC and CPPCC meetings. Official news outlets are continuing a blackout on the subject. 

“We should support the party’s governance of media and maintain an accurate direction in our coverage,” Shen Haixiong, director of the ruling Communist party’s propaganda department in southern Guangdong province, said at a conference late last year. “Definitely do not mention capital controls.” 

Additional reporting by Liu Xinning