China hones in on Forex transactions to prevent money exiting abroad
Long at risk of capital flight, China has begun the new year by making a stand. In a bid to prevent money exiting abroad, the country has now imposed extra requirements on citizens converting yuan into other currencies.
According to the currency regulator, the State Administration of Foreign Exchange, China is focusing on closing loopholes that have long been exploited for the purposes of money laundering and channelling funds into overseas properties.
Leaving their quota of $50,000 of foreign currency per person per year untouched, they have nonetheless implemented additional disclosure requirements which came into effect on 1st January.
This annual limit is automatically reset at the beginning of each year. It is widely believed to increase outflow pressures, an especial problem after the currency experienced its most dramatic annual slump in over 20 years in 2016.
New Forex Rules
According to figures from a Bloomberg Intelligence gauge, approximately $762 billion flowed out of the country between January and November of last year. This money is believed to have shored up residential property markets from Vancouver to Sydney, with some also making its way across the border into the Hong Kong insurance sector.
There are a number of key elements to the requirements introduced to remedy this issue, such as a pledge by customers not to use funds for the purposes of overseas property purchases, life or investment insurance, or securities. In addition to this, detailed plans concerning the intended use of capital converted must be supplied.
- Pledge on purpose of spending
- Details of intended use
- Specific measures on anyone ignoring the guide
Those who are found to violate the rules will be included on a currency regulator watch list, which has the power to not only deny their foreign exchange quota for up to three years, but also to perform anti-money laundering investigations.
According to Zhao Yang, a Chinese economist, this will have the effect of dulling the allure of dollar purchases and should thus reduce the pressure on capital outflows.
The measure may be a timely one, for the yuan is now approaching an eight-and-a-half-year low. For Chinese markets, the road ahead could indeed be rocky, and those with interests should re-assess their investment strategy with this in mind.
State intervention in terms of currency value is nothing new, particularly in this region. The China-US relationship may also come under increased scrutiny in light of some of Donald Trumps’ statements, so Forex volatility with the Yuan looks almost assured during 2017.