China added new restrictions on pulling yuan out of the country as authorities seek to prevent a flood of capital outflows from destabilising the financial system.
Officials won’t approve requests to bring the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason, according to people familiar with the measures drafted by China’s central bank. The monetary authority has noticed funds are increasingly leaving the country as yuan payments, according to the people, who asked not to be named because they aren’t authorised to disclose the measures.
China is throwing up fresh administrative roadblocks to contain capital outflows before a likely US interest-rate increase next month and the reset of Chinese citizens’ $50,000 annual foreign-exchange quotas in January. The equivalent of $275bn exited the country via yuan payments this year through October, versus a $101.5bn inflow in the same period of 2015, as the Chinese currency weakened to an eight-year low against the dollar.
“The underlying depreciation pressure on the yuan has picked up enough to cause alarm,” said Sean Callow, a senior strategist at Westpac Banking Corp in Sydney. “The People’s Bank of China has lots of weapons at its disposal, so they should be able to slow the pace of capital outflows and thus relieve the pressure on the yuan in the short term. 
But if it is true that new restrictions are being imposed on capital flows, then it is a setback for the long-term plan to open up China’s financial markets and internationalise the yuan.”
The new measures, which follow a raft of other steps this year to restrain outflows, suggest China is placing more emphasis preserving foreign-exchange reserves than targeting a particular level for the yuan, said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group in Hong Kong.
After keeping the yuan steady at around 6.7 per dollar from July through September, the PBoC has since allowed the currency to weaken beyond 6.9, a level last seen during the global financial crisis in 2008. Foreign-exchange reserves, meanwhile, declined last month by the most since January.
“It is smart to use administrative measures to reduce capital outflows and defend the exchange rate, because China’s foreign reserves are dropping,” said Ken Cheung, a Hong Kong-based Asia currency strategist at Mizuho Bank. 
“Chinese authorities understand the capital outflow pressure is persisting, but will only let it run its course at an orderly pace.” China also will further standardise companies’ outbound direct investment, strengthen inspections on whether related deals are real, and develop a system for firms to report big cross-border fund movements for ODI in advance, the people said. The PBoC didn’t immediately reply to a fax seeking comments.
Administrative hurdles are just one of several ways authorities have sought to clamp down on outflows in recent months. This year, officials have also banned the use of friends’ currency quotas, curbed the cross-border activities of underground banks and made it more difficult to buy insurance policies in Hong Kong.
Attempts to verify that yuan payments have a valid use will be hard for China to implement without disrupting the economy, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “It will basically freeze all such activity if zealously enforced, meaning China steps back from any global role except as a net exporter – where it is already under political pressure,” Every said. “Or, it will be another paper tiger regulation.”
In the latest sign that capital outflows are difficult to control, figures reported yesterday by the Office of the Commissioner of Insurance in Hong Kong showed the city’s insurance sales to Chinese residents surged to a record in the third quarter – even as officials tightened rules to discourage them. The policies are often used by Chinese citizens as a way to shift funds out of the country.


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