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China’s new rule on FX purchase a ‘big strategy’ under ‘complex context’: expert

 A bank in eastern China last year. In an attempt to bolster the yuan, Chinese banks were ordered over the weekend to step up scrutiny of individuals’ purchases of foreign currency. Photo: Agence France-Presse/Getty Images

Chinese residents hoping to buy US dollars now need to fill a detailed application form indicating their purposes of buying after the State Administration of Foreign Exchange (SAFE) announced the new regulation on New Year’s eve on Saturday, which experts believe has some relationship with the speculation of further depreciation of the renminbi and a decrease in foreign exchange reserves.

According to the new regulation, Chinese people purchasing foreign exchange are restricted from buying overseas property, securities, life insurance and other investment-style insurance products, while they are approved to non-investment uses including tourism, education, business travel, and medical care.

Before the regulation, individuals who purchase foreign exchange in a bank were only inquired orally about their purposes by the bank staff who would then enter their information into the computer system, while now individuals have to fill the application form no matter they purchase the foreign currency at a bank, through an online bank, or on their mobile applications.

The SAFE also said it would step up scrutiny on individual foreign currency purchases and strengthen punishment for illegal money outflows, while the $50,000 annual individual quota remains unchanged.

In addition, starting in July 2017, banks and other financial institutions in China will have to report all domestic and overseas cash transactions of over 50,000 yuan ($7,201), down from the previous 200,000 yuan, the country’s central bank, the People’s Bank of China (PBOC), said one day before the new restrictions on forex purchase came into place.

According to the SAFE, a more stringent supervision over the purpose of forex is aimed at closing loopholes in the current system that have led to illegal transactions such as money laundering and money transfers via underground banks.

The new rule came as people speculate that the government is putting brakes on individual purchases in order to control capital outflows amid yuan devaluation and pressure of foreign exchange reserve drop.  

Lao Xiao, an expert on the foreign exchange market, said in an interview with the sino-us.com that the regulation is not simply about protecting the foreign exchange reserve, but a “big strategy” under a “complex context.”

According to the new rule, those who purchase forex in a so-called “ants moving their houses” way, a Chinese idiom meaning buying the foreign exchange many times with each time only a small sum, will be listed on a blacklist and canceled the right to purchase $100,000 in two years, although Chinese authorities have already tightened their scrutiny over such behavior since 2015.

“The new policy will have a huge influence on Chinese residents’ overseas immigration and investment because they are the ones who usually purchase forex like ants moving their houses,” said Lao Xiao.

Xiao also said that the new policy has a certain connection with a decrease in China’s foreign exchange reserve which may threaten the national security and stability once it drops below $2,000 billion, while China’s foreign exchange reserve was about $3,000 billion as of November 2016.

China has made efforts to stabilize the foreign exchange rate and renminbi value without exhausting its foreign exchange reserves since the foreign exchange reform in August 2015, but the forex reserves have been decreasing because of the market’s strong anticipation on renminbi depreciation and economic slowdown, according to Xiao.

According to media reports, China’s economic growth could slow to 6.5% this year from about 6.7% in 2016. The yuan fell by nearly 7 percent against the dollar in 2016, and some analysts said it will continue to face depreciation pressure against the dollar at the beginning of this year given the dollar's recent strengthening and a sluggish economic growth. The fiscal and economic policies of US President-elect Donald Trump are also creating stronger incentive to buy dollars in China.

According to research by Financial Times, household demand for foreign exchange spiked in December, with more than 55 percent of the 1,000 families surveyed hoping to have at least 10 percent of their wealth invested in foreign exchange, compared with just 38 percent last January.

The speculation that the Chinese government is controlling capital was also denied by the state-owned Xinhua News Agency which says that the new rules on cash transactions and overseas transfers are not capital control, although it doesn’t allow individuals to buy foreign currencies for overseas property, securities and life insurance.

The SAFE pointed out that the new rule that restricts Chinese residents from buying property overseas is not a new policy because individuals’ purchase of overseas property and investment doesn’t amount to opening capital account.

“The current China’s capital account is not fully convertible yet, and individuals’ overseas investments can only be fulfilled through regulated channels, for example the Qualified Domestic Institutional Investor (QDII),” SAFE said.


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