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Renminbi faces test as Chinese forex quota resets

Chinese residents hoping to cash out of the renminbi will face a great wall of paperwork on Tuesday in a key test of confidence for the currency as the annual quota for individuals’ foreign exchange purchases resets.

With individuals in China allowed to purchase up to $50,000 worth of foreign exchange each calendar year, observers will be watching closely for any signs of a rush to use up their limit as banks reopen after the new year holiday.

The incentive to buy dollars is strong after the US Federal Reserve’s December rate rise — and the fiscal and economic policies of US president-elect Donald Trump are only expected to accelerate the renminbi’s two-year decline against the greenback.

The onshore renminbi is down by almost 8 per cent against the dollar since April, and by 15 per cent over the past two years, but has risen in value relative to other major currencies.

Household demand for foreign exchange spiked in December, according to a monthly survey by FT Confidential Research. More than 55 per cent of the 1,000 families surveyed hoped to have at least 10 per cent of their wealth invested in foreign exchange, compared with just 38 per cent last January.

“The government needs to delink confidence inside China with the dollar,” said Jeremy Stevens, China economist at Standard Bank. “Why should households panic because the renminbi is depreciating against the dollar but strengthening against the euro, yen and pound sterling? That’s what they need to get a grip on.”

China’s central bank has been selling dollars from its forex reserves, which stood at just over $3tn at the end of November, in an effort to slow the renminbi’s fall. That has kept the renminbi from falling through Rmb7 to the dollar — a level Chinese officials did not want the currency to breach ahead of this week’s quota reset.

On Friday the renminbi closed at 6.95 to the dollar in onshore trading and 6.98 in offshore markets.

Ahead of the new year holiday, government officials went on a propaganda offensive. China’s tightly controlled media outlets quoted a senior foreign exchange official as saying that $3tn in reserves was “adequate”, and published front-page articles playing down the significance of the Rmb7 support level.

The rhetoric was reinforced with more concrete action at the weekend when the State Administration for Foreign Exchange announced that it would increase filing requirements for — and scrutiny of — individuals’ foreign exchange transactions.

Safe said the $50,000 limit would not be changed for legitimate uses, such as overseas travel and education, but warned against using the quota for investment purposes. In the past many families would pool their individual quotas to fund overseas property purchases.

“Such transactions disrupt market order and erode the interests of people who abide by the rules,” Safe said. The regulator added that people who tried to evade the rules would be blacklisted and possibly banned from buying foreign currency in future.

The more rigorous bureaucratic scrutiny outlined by Safe mirrors earlier measures taken to scrutinise Chinese companies’ overseas investments and dividend remittances by foreign companies.

Safe also echoed comments ahead of the holiday by Ma Jun, chief economist at the People’s Bank of China, who warned investors not to be “too optimistic” about the dollar.

“Interest rates in major developed economies are low and the renminbi’s effective exchange rate [against a trade-weighted basket of currencies] is basically stable,” Safe said, adding that “holding forex assets carries big uncertainty and risks”.

Via FT