China Tightens Capital Controls

Speculative inflows into China are picking up and are likely to increase as the economy gains momentum and expectations of a stronger yuan grow. Thus, policymakers are considering a range of administrative measures to make individual speculation more difficult.


According to Alaistair Chan, associate economist at Moody's, increased capital inflows threaten to send asset prices higher because of the government's need to increase liquidity in exchange for speculators' foreign currency.
Chan explains that capital controls prevent the conversion of foreign exchange for yuan outside of China, but some leakage occurs, especially in the Hong Kong region. He says that Chinese citizens are allowed to convert $50,000 into (341,325) yuan per year, or take that equivalent amount of yuan out of the country.
Meanwhile residents in Hong Kong are allowed to convert 20,000 yuan ($2,930) per day. However, Chan says, this can be evaded somewhat by crediting the accounts of multiple individuals in China. This helps alleviate the flow of capital in the opposite direction—the revival of the Hong Kong property market may be in part due to China's monetary stimulus—but China is nevertheless wary of allowing excessive speculation on its currency.

According to Chan, the latest measures restrict an individual from sending currencies to five or more individuals on a single day (or consecutive days) for conversion into yuan. Individuals in China will also be restricted from receiving foreign exchange from the accounts of five or more 'near kin'.
"Given the growing perception that the yuan is a one-way bet, China's policymakers are likely to come up against increasingly creative ways of evading their rules," says Chan, adding that the administrative measures are likely to only buy the government some time before it addresses the underlying issue of the yuan's value.

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