China has tightened checks on citizens exchanging foreign currency in anticipation of renewed downward pressure on the renminbi in the new year.
Banks have been asked to improve standards for verifying customers’ identities and to report “large or questionable transactions”, the State Administration of Foreign Exchange (Safe) said in a public statement at the weekend.
“There have been leaks in China’s system of personal foreign exchange purchases,” the statement said, giving as an example the way individuals and companies avoid capital controls on overseas investments by disguising their transactions as goods purchases.
China’s policymakers have clamped down on capital flows leaving the country in recent weeks, imposing fresh restrictions on outbound corporate acquisitions and investments. European companies have reported difficulties in remitting dividends to stockholders abroad. The restrictions are partly an attempt to keep the renminbi from steep falls in the future after it depreciated almost 6 per cent against the dollar in 2016.
China’s capital controls limit individuals to buying no more than $50,000 each year in foreign currency, a quota which resets on Sunday, January 1. The renminbi may come under fresh pressure to weaken when individuals use their fresh quotas after banks reopen on Tuesday.
“The first day of the new year can be crazy — it’s always a big test for the renminbi,” said Jonas Short, head of research at NSBO China, an investment bank. “People who are anticipating further renminbi depreciation will take out their quota early in the year, and some will want to take out the full amount as soon as they can.”
The central bank is trying to ensure the renminbi’s value stays above the red line of Rmb7 per dollar, a symbolic number for the country’s policymakers. The renminbi was trading at Rmb6.94 to the dollar at the weekend.
On Thursday night the central bank, the People’s Bank of China, scolded media outlets for being irresponsible in reporting the exchange rate crossing Rmb7 to the dollar, after a momentary glitch in the Bloomberg currency quote system showed the renminbi weakening beyond that point during overnight trading.
China’s foreign reserves fell by almost $200bn last year after the central bank sold dollar reserves in order to prop up the value of the renminbi against the dollar.
At the same time as guarding the Rmb7: $1 line, central bankers are also trying to keep foreign exchange reserves falling below the $3tn mark. Domestic economists say the two goals are hard to achieve simultaneously without the help of capital controls.
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