China tightens currency controls to curb inflows

AP
China tightens currency controls to curb inflows
Thursday August 7, 7:18 am ET
By Elaine Kurtenbach, AP Business Writer

China tightens controls on foreign currency, moving to curb inflows of speculative 'hot money'

SHANGHAI, China (AP) -- China has issued new controls on transfers of foreign currencies, moving to contain inflationary pressures by curbing the speculative inflows, or so-called hot money, that has been flooding into the country in recent years.

The new rules, issued late Wednesday with immediate effect, call for penalties of up to 30 percent of the capital involved in any unauthorized inward or outward foreign currency transfers. They give authorities stronger control over such transactions and expand reporting requirements for financial institutions.

"As China's economy becomes more internationalized and the movement of international capital flows accelerates, there is a need to improve the system and oversight of multinational capital movements," the State Administration of Foreign Exchange, or SAFE, said in a statement posted on its Web site.

Economists say that billions of dollars in speculative money have flowed into the country, seeking higher returns as the value of the Chinese currency has risen against the U.S. dollar. Such investments, often in real estate or stocks, inflate the money supply, adding to pressure for prices to rise at a time when inflation is already at 12-year highs.

SAFE's statement noted a need to protect against the risks of such movements and to increase the level of transparency in managing them.

The new rules, amending regulations set in 1997, appear broader in scope than limits announced by SAFE last month that called for authorities to check invoices to ensure they are not being inflated as an excuse to bring unauthorized money into the country.

The revised regulations order government departments to simplify regulations on foreign direct investment and authorize them to crack down on illegal transactions.

At the same time, they allow trading firms to keep profits overseas instead of repatriating them.

That change could help reduce legitimate, business-driven demand for China's currency, the yuan, noted Ken Peng, an economist at Citibank, in Shanghai.

"The effects on hot money, however, would depend on how well the administrative tightening is carried out," Peng said in a report Thursday.

The government closely monitors money that enters the country for trade and investment and does not allow China's currency to trade freely on world markets, limiting its fluctuations against the U.S. dollar and other major currencies.

Those controls have long rankled trading partners who want Beijing to let the yuan trade freely, with its value determined by the market. Chinese officials have vowed to loosen controls, but say the country's developing financial system would be too vulnerable to speculative fluctuations in the currency markets.

Until recently, the Chinese yuan has been steadily gaining in value against the U.S. dollar, following a 2005 revaluation that took its value from 8.26 to the dollar to 8.11. But after hitting a record close of 6.8056 on July 16, in recent weeks the yuan has weakened against the dollar.

On Thursday, the dollar was trading at 6.8593 yuan around 0700 GMT on the over-the-counter market, up from Wednesday's close of 6.8484.

There are no official figures on how much unauthorized money has entered China. But the official Xinhua News Agency, citing unidentified analysts, put the figure at $147.9 billion in the first five months of this year.

"The inflow of hot money has had some negative impact on the economy. It is hoped that the regulation can enhance monitoring and control some speculative investment and foreign capital inflows," the official Xinhua News Agency quoted Zhang Ming, an expert at the Chinese Academy of Social Sciences, as saying.