New forex controls in China to combat “hot money”
By Andrew Wood in Hong Kong and Peter Garnham in London
Friday, August 08, 2008
China has strengthened controls on inflows of foreign exchange into the country to deal with fears of speculative “hot money” that could destabilise the economy, while at the same time making it easier for capital to leave its borders.
Analysts said the move could stem the rise in China's foreign exchange reserves, the largest in the world, and slow the pace of the renminbi's appreciation.
The changes were a “comprehensive revision” of the previous rules on foreign exchange, which were last updated in January 1997, the State Administration of Foreign Exchange, the regulator, said.
SAFE said it would take “safeguard and controlling measures” over its international payments system to protect the economy in a crisis. Fresh measures to bring “convenience to trade and investment” include a simpler process for Chinese companies and investors to get approval for overseas investment, SAFE said.
They will no longer be required to repatriate foreign income and sell it to or deposit it with selected banks – such rules were a hangover from the 1990s when the authorityies' main fears were about outflows of capital.
Although few details of the proposed changes were made available, analyst said it seemed that the measures were likely in part to be aimed at stemming hot money inflows – speculative funds that can cause asset price inflation and which can destablise financial markets when withdrawn en masse.
These inflows were estimated to be as much as $200bn in the first half of the year and represent significant inflationary challenges to policymakers.
“Tougher access to Chinese financial markets will put a lid on liquidity, which has been fuelling inflationary pressures on the mainland,” said Sherman Chan, an economist at Moody's Economy.com.
Analysts said the changes were also consistent with the authorities' apparent desire to slow the pace of renminbi revaluation.
Indeed, on the news the currency forwards market moved from pricing in a 3.7 per cent rise in the renminbi against the dollar over the next year to pricing in a 3.5 per cent climb.
