Renminbi (Rmb) liberalisation has been put on the backburner, with China placing further restrictions on capital outflows.
The Rmb is facing its worst year since it was unpegged from the US dollar in 2005. It reached an eight-year low in November against the US dollar and has lost almost 6% of its value this year.
Currency reserves are down to their lowest levels for more than five years, while net outbound Rmb payments stand at more than Rmb1.8tn for the year to date. The Chinese government is turning to currency controls as a means of arresting the decline.
According to one report, companies are now permitted to send no more than 30% of equity to an offshore operation, as of the end of November.
This follows recent moves to restrict the amount of outbound FDI, with the People’s Bank of China (PBOC) placing a US$10bn cap on foreign investments by Chinese firms in non-core business assets. For real estate investments, the cap is US$1bn.
The government has also been restricting its own expenditure overseas: China’s outbound investments fell by 35% in the third quarter of 2016, with a 90% decline in direct government-to-government loans.
China has reported an FDI deficit in four of the past five quarters, after posting surpluses every other quarter since 1998. After reporting its biggest ever FDI deficit in Q3, the government took action.
Restricting capital flight and steadying the Rmb now seems to have supplanted currency liberalisation as priority policy.
“We haven’t seen the impact on companies yet [of the interbank lending limits], but it’s true that China is trying to limit the capital outflows. They put a threshold on FDI that can go abroad. Why did they do that? Not just to stop it going out, but it was going out too rapidly. They didn’t have any control over it, and they want to,” Mahmoud Islam, Asia economist at Euler Hermes, tells GTR.
Of particular concern to the government will have been clandestine capital flight: the use of trade invoicing and M&A deals to conceal currency leaving the country. Both domestic and foreign banks have been ordered to query the conversion of Rmb into foreign currency, even on relatively small scale.
Islam also points to the discrepancies in trade data between China and Hong Kong. Over-invoicing has long been viewed as a means of flouting capital controls in China, or of getting money out of the country without reporting it in the proper manner.
The Rmb’s usage as a payments currency has been declining too: the most recent data from Swift shows that the use of Rmb for trade finance payments has come down 68% since 2013, despite Beijing’s effort of to push its use through the establishment of tens of offshore clearing hubs.
There is some irony to be found in the latest news, in the wake of a visceral US election campaign in which China was constantly accused of manipulating its currency downward. Now, just weeks after the IMF included the Rmb in its special drawing rights (SDR) basket of reserve currencies, the government is attempting the very opposite.