(Jan 19): As cash continues to flood out of China, expectations are growing that the authorities will erect higher barriers.
With the nation’s capital outflows last year estimated at US$728 billion by Standard Chartered Plc, and the yuan predicted to continue declining against the dollar in 2017, analysts have been casting forward to what the authorities may do next to stop funds from fleeing.
Recent measures include restrictions on buying insurance products in Hong Kong, limiting overseas acquisitions and investments, and demanding more details from citizens when converting their annual quota into foreign exchange.
China’s currency regulator says such steps have been taken to strengthen existing policies, and don’t equate to capital curbs. "China will not return to walking the old path of using capital controls under a planned economy," the State Administration of Foreign Exchange (SAFE) said in e-mailed comments on Wednesday. SAFE will evaluate plans to deal with capital flows “prudently” before implementing them, a regulatory official said at a briefing on Thursday, without giving details.
Here’s what analysts say China may do next:
1) Limit Overseas Spending
The government may cap UnionPay credit-card spending by its citizens abroad on high-value products such as art and antiques, said Robin Xing, chief China economist at Morgan Stanley. Chinese buyers helped push up prices at auctions in recent years. Billionaire Liu Yiqian used his American Express card to pay the US$45 million bill for a 15th century Tibetan embroidered silk thangka last year.
2) Pressure Exporters
The biggest move authorities can make would be to force exporters to sell their foreign-exchange proceeds, said Brad Setser, a senior fellow at the Council on Foreign Relations in New York and a former US Treasury Department official. Such a step would help tackle one of the key sources of the yuan’s weakness. Chinese exporters converted the equivalent of 56% of their overseas revenues into yuan in November, compared with a monthly average of 71% in the four years through 2013, when the currency was gaining.
A measure like this would require outflows to pick up significantly, since it could disrupt trade, said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc. It would be "a move backward from the vision of a China that’s more seamlessly integrated into the global financial system,” Setser said.
3) Tax Currency Transactions
The currency regulator said in March last year China was considering imposing a tax on foreign-exchange trading to limit capital outflows. The nation’s central bank has already drafted rules for such a measure, people familiar with the matter told Bloomberg News that same month. A so-called Tobin tax would complicate plans by China to boost the yuan’s global role and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy.
The Tobin tax takes its name from US economist James Tobin, who in 1972 suggested taking a cut of foreign-exchange trades to limit currency speculation. History is littered with government attempts to extract revenue from financial transactions, not all of which were successful and most of which had unintended consequences.
4) Clamp Down on Bitcoin
Chinese investors increasingly turned to the cryptocurrency to hedge against the weakening yuan and take cash out of the nation, helping bitcoin rally to beat every major currency, stock index and commodity contract in 2016. While the US$14 billion total value of bitcoin makes it minor relative to most asset classes, it’s sensitive to any moves by China to curb trading. Bitcoin has tumbled 6.5% this year after central bank officials visited exchanges and warned investors about the dangers of trading the asset.
Policy makers are likely to require more reporting from bitcoin exchanges and incorporate their flows into the monitoring of citizens’ annual US$50,000 quota to buy foreign exchange, said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.
5) Control Banks
China’s cash exodus has been partly driven by an increase in financial institutions’ overseas assets. Outflows via loans rose to US$37.2 billion in the third quarter, near a record in balance of payments data going back to 1998. Policy makers can probably discourage state banks from building up foreign assets, and may have done so last quarter, said CFR’s Setser.
The central bank also plans to encourage lenders to issue more dollar-dominated debt offshore, Bloomberg News reported this month. Banks can convert such funds raised overseas into yuan with the People’s Bank of China, helping to boost the central bank’s foreign-currency reserves.
6) Encourage Inflows
Luring more foreign funds into China would obviously help counter outflows. In particular, Chinese officials have been courting compilers of global stock and bond indexes, such as MSCI Inc, to get the country’s assets included. Such acceptance would be a coup: HSBC Holdings Plc estimated that inclusion in major bond measures could help draw as much as US$150 billion to Chinese government debt, and a probable US$30 billion if shares were added to MSCI gauges.
Ironically, it’s China’s limits on the freedom to withdraw money from the country that discourages inflows. MSCI cited restrictions when it decided against adding Chinese shares to its global indexes in June, saying the limits remain a “significant hurdle” for investors.
All these measures aside, as long as Chinese financial markets remain weak and monetary policy continues to diverge with the US’s, money is likely to keep exiting the nation.
“Capital-control measures can help mitigate the pace of capital outflows in the short term,” said Morgan Stanley’s Xing. “However, the fundamental factors behind the outflow — decline in investment returns in China and a continued slippage in interest-rate gaps between China and the US — have remained in place and will likely keep capital outflow pressures alive in the medium term.”