Offshore yuan market in Hong Kong shrinking
South China Morning Post
Thursday, December 1, 2016, 4:30 p.m.
China’s central bank is to limit the amount of renminbi that Chinese companies can remit outside the country, imposing a cap for the first time in more than two decades to stem the yuan’s outflow as the currency plumbs daily lows.
Analysts suggested Beijing may have decided to put its ambition to make the yuan an internationally used currency on hold, and made its priority stemming the outward flow of yuan, which has become a loophole to the currency for arbitrage.
Non-financial companies domiciled in China will be limited to lending the equivalent of 30 per cent of the owners’ equity to an overseas company, according to Order No. 306 issued Monday by the People’s Bank of China, a copy of which was obtained by the South China Morning Post.
The lender and the borrower should also have an existing shareholding relationship, according to the document.
For companies making frequent applications for offshore lending short term, banks will now ask them to explain their reasons fully.
If banks find their behaviour against the rules, they can suspend making settlements of payments of their behalf.
Any companies already exceeding the cap – outstanding overseas lending exceeding 30 per cent of their total owners’ equity – banks can now immediately suspend the provision of further outflowing liquidity.
A source with the New York branch of the Industrial and Commercial Bank of China told the Post it had already seen two cross-border payments stopped due to the new rules, and expect more yuan outflow applications to be blocked or checked.
Li Yimin, a senior analyst with Shenwan Hongyuan Securities, said it was too early yet to say if China is withdrawing from its long-standing policy of pushing the yuan as a global currency.
“It is true that previously, the controls were mainly aimed at controlling yuan inflow, to prevent too much hot money flocking in.
“But this time, the focus is on the yuan’s outflow, which has been encouraged in the past few years as China targets making the yuan more internationalised,” he said.
“The logic [behind the new measures] is to drain offshore yuan liquidity, because too many people are exporting yuan outside for currency swaps, or to shorting the currency, as a way of skirting domestic restrictions,” he noted.
Aidan Yao, senior emerging Asia economist at AXA Investment, said the new policy was consistent with a slew of policies gradually introduced by the central bank to stem outflow over the past few weeks.
“The offshore yuan market in Hong Kong has been shrinking, so some speculators are using yuan outflow as a way of shorting the currency. The central bank has also been considering bringing the cross-border business of the larger lenders under stricter scrutiny, as some of them have been using overseas lending and investment as a cover for capital flight,” he said
Net outbound yuan payments have hit 1.8 trillion in the year to date, while offshore yuan deposits declined by 255.7 billion yuan, suggesting RMB outflows may have become a way for Chinese companies to circumvent foreign exchange controls, a report issued by the International Capital Corporation (CICC) on Monday said.
This is a reversal in government policy, which had previously encouraged the renminbi’s worldwide usage, part of a long-term strategy to fully internationalise the currency. The central bank has instituted a range of measures to plug gaps where the currency could be remitted amid its 7 per cent slump this year against the US dollar, from banning Chinese citizens from buying insurance policies offshore, to requiring credit card companies to seek currency licenses.
The onshore rate of the yuan declined by 0.1 per cent to 6.8944 per dollar today, according to data provided by Shanghai Wind Information. The central bank today set the yuan’s daily reference rate at 6.8958 per dollar, 93 basis points weaker than yesterday.
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