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China Capital Flow Crackdown Results In $148 Billion Bust

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China Capital Flow Crackdown Results In $148 Billion Bust

China’s campaign to crack down on illegal capital outflows saw its currency regulator bust underground banking operations that involved more than 1 trillion yuan ($148 billion).

The State Administration of Foreign Exchange also seized $8.43 billion in foreign exchange funds as part of the nationwide checks on illegal outflows, the Financial News reported Thursday, citing Zhang Shenghui, an official at the regulator. SAFE suspended foreign exchange settlement and sales at three banks earlier this year after they failed authentication checks, the report said, without naming the lenders.

SAFE confirmed the report in an e-mailed statement and said the agency would continue to monitor abnormal cross-border capital flows and crack down on underground banks to maintain stability of the foreign-exchange market.

The news underscores both the desire of Chinese to diversify money out of their country, and the determination of authorities to restrict outflows that put pressure on the nation’s currency and trigger even greater capital flight. The yuan has depreciated 7.8 percent against the U.S. dollar since the People’s Bank of China’s mini-devaluation in August last year. It has fallen 1 percent this month alone.

“As regulators tighten the formal channels, underground activities seem to be heating up,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.

China has repeatedly shown that it’s prepared to play hardball to head off disorderly declines in the yuan, including through ramping up offshore yuan borrowing costs in Hong Kong. Chinese investors determined to squirrel money out have turned to life-insurance policies in Hong Kong, camouflaged tourist spending abroad and faked trade invoices among their creative methods. Declining yuan deposits in offshore banks also point to the demand to get money into other currencies. 

A flurry of investment banks have warned that capital outflows could be larger than anticipated amid ongoing demand for foreign currency. Deutsche Bank AG said outflows would intensify in the next few months as economic growth slows and the yuan weakens.

Outflows Underestimated

Goldman Sachs Group Inc. analysts have estimated that outflows may be larger than they look because an increasing amount of capital is exiting the country in yuan rather than in dollars.

While China’s currency reserves have stabilized, and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low, official data show that $27.7 billion in yuan payments left China in August. That’s compared with a monthly average of $4.4 billion in the five years through 2014. Such large cross-border moves can’t be explained by market-driven factors and need to be taken into account when measuring currency outflows, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs.

Illicit flows could have increased to $246 billion in the third quarter of the year from $133 billion in the previous three months, according to Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong. “Some outflow channels are blocked, but that doesn’t block demand,” said Pang. “New grey and black markets may emerge.”

China’s reserves, the world’s largest, have hovered around the $3.2 trillion level since February, after shrinking $323 billion over four months as the PBOC sold dollars to limit declines in the yuan.

The country remains far from a currency crisis, and outflows remain a long way from the $170 billion peak seen in December. Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a recent note that China continues to have sufficient defenses and limited vulnerabilities.

“From Mexico in 1994 to Turkey in 2001, crisis countries had a combination of high foreign debt, insufficient FX reserve buffers and limited policy space,” they said. “On those metrics, China looks relatively secure.”

Source: Bloomberg

By Pathay Singh on 10/25/16