Although the move is yet to be officially announced, the People’s Bank of China (PBOC) is reportedly planning to loosen Capital Controls over foreign fund outflows. The move comes even as Beijing struggles to stem the tide of capital leaving the country as a result of the recent economic slowdown. Bloomberg ran a report on the matter on Wednesday which cited people familiar with the matter.
As Scotia Bank notes:
China stepped up administrative measures to control capital outflows that have persistently fuelling market fears over the yuan valu-ation. Guo Song, head of SAFE capital account management depart-ment, said that China will face capital outflow pressure in 2016. Bloom-berg reported yesterday that the SAFE has capped purchases of insur-ance products overseas with UnionPay debit and credit cards at USD 5,000 per transaction with effect from 4 February. According to data of Office of the Commissioner of Insurance Hong Kong, purchases of insur-ance policies by mainland visitors in the SAR amounted to HKD 21.1bn in the first nine months last year, up 24.6% yoy
Capital Controls – New rules in China will make it easier for foreign investors to withdraw money
Changes will be made to controls imposed on money invested by foreigners in domestic stocks and bonds. The move is part of a wider drive to open Chinese markets and boost the standing of the yuan as a world currency.
According to reports one of the changes involves the removal of the lock-up period for funds under China’s Qualified Foreign Institutional Investor (QFII) program. International investors will soon be able to remove their money on a daily basis, whereas current rules impose a lock-up period of either a week or a month.
The QFII program was launched in 2002, allowing foreign investors to trade in shares on the Shanghai and Shenzhen exchanges. At the same time the amount of shares that foreign investors can buy is limited by quotas which determine how much money licensed foreign investors can pour into Chinese capital markets.
Capital Controls – Economic troubles could see capital controls reinstated in other areas
China is currently struggling to reverse currency outflows that are undermining the yuan and depleting Beijing’s foreign exchange reserves. In 2015 it is estimated that $1 trillion in capital left the country.
Officials have been using forex reserves to prop up the troubled yuan, leading to a drop of $513 billion to $3.33 trillion. It marks the first time that China’s foreign exchange reserves have dropped since 1992.
At the same time as the PBOC plans to loosen foreign outflow controls, a report in the Wall Street Journal said that China’s central bank will “aggressively” reinsert capital controls elsewhere. The report cited people with direct knowledge of the matter.
None of the measures have been publicly disclosed, but it is thought they involve restrictions on the ability of foreign companies to repatriate earnings, as well as banning yuan-based funds from investing abroad.
“They’re sparing no effort to prevent capital outflows,” a senior Chinese banking executive with ties to the central bank told the Journal. “All the measures are the most aggressive I’ve seen in recent history.”
The third requirement involves China, which is the source of a variety of problems. If China does what it should do, I think we will see a dramatic change. First of all, China must stimulate economic growth. However, there have been no benefits so far despite numerous initiatives. Prospects are poor for a full-scale economic rebound in China. So what is the most important action that China can take now? The answer is to control capital properly. While implementing
these controls, China will have to demonstrate that its monetary easing will not cause the yuan to weaken. I think this would block all channels for speculators to create a market selloff. This is why stronger capital controls by China could be the third requirement for a major turning point.
I want to make one more point. An upturn in the real economy will take time and is not likely to occur at this time. But decisive and coordinated economic measures by developed countries, which are the second requirement, may take place. Capital controls in China are the third requirement. I think financial markets could stage a strong rebound if any one of the three requirements is fulfilled. But the one that is likely to occur very soon is capital controls in China. Based on this outlook, I think that an end to the stock market downturn may not be far away.