SAFE Targets Outflows, Will Examine FX Management and Cross Border Payments
The State Administration of Foreign Exchange (SAFE) said it will strengthen monitoring of cross-border capital flows as it looks to promote “healthy development” of the foreign exchange market.
China will “establish a sound macro-prudential management framework under the capital flow management system, requiring banks and enterprises to comply with existing foreign exchange regulations”, the regulator said in a statement on its website.
“Real and legitimate cross-border payments and remittances will not be affected,” it added.
All cross-border payments are legitimate in the eyes of the parties involved.
This bit is noteworthy:
Firms who want to remit foreign exchange profits equivalent or above $50,000 out of China must submit resolutions from board of directors on profit distribution, alongside tax documents and audited financial statements, according to the new rules.
The SAFE said it will standardise management of trade-related foreign exchange business and said exporters should collect their foreign exchange payments in a timely way.
Under the new rules, domestic firms must use proceeds from their exports to repay foreign exchange loans, rather than buying foreign exchange from banks.
That’s a red flag. Chinese exporters can hoard dollars by leaving them offshore, as was revealed back in 2011 and 2012 when the currency first dipped offshore: Chinese hoard dollars
China’s largest privately run shoemaker, Aokang, exports 40 million pairs of shoes to the United States and Europe each year. Previously, the firm would swap U.S. dollars for yuan on the same day they were received, but now, “[We] keep as much as possible, we even wish we could keep all of it.”
In the wake of the PBOC’s interest rate cuts, demand for U.S. dollars has increased as the interest rate spread between the two currencies narrows.
The CEO of Aokang used to ignore the renminbi exchange rate because it was in an appreciating trend versus the U.S. dollar, but now he views it online everyday. Other executives check the exchange rate changes daily.
Hoarding of U.S. dollars is helped by an April 16 change in financial regulation, when SAFE repealed the regulation that compelled businesses and individuals to exchange their U.S. dollar remittances for renminbi.
…A Dongguan shoe exporter has the same strategy as Aokang. Before, they would immediately exchange USD, EUR and JPY for CNY, but now they consider their business needs and the exchange rate before changing money. They slowly increased their retention rate of U.S. dollars from nothing to a current 40%.
How stable is the Chinese yuan if the government doesn’t want exporters sitting on their USD holdings? Also, declaring what is “legitimate” and squeezing exporters will have an unintended side effect of creating new dollar demand. The dollars sitting offshore are temporary currency speculation. Once the yuan becomes cheap enough, or depreciation is though to be ending, these dollar hoarders will pile back into onshore yuan. Instead, some businesses will now find legitimate needs, maybe commercial real estate, and park those dollars in a more permanent form.
Some of the other goals point to opening the market though. From the iFeng coverage: 外管局：今年银行考核增加外汇管理和跨境收付款差额
Wang Chunying pointed out that the first to enrich the trading tools, improve the open, delivery and other trading mechanisms to expand the functions of derivative products management enterprise exchange rate risk, increase the type of foreign exchange options products, the introduction of foreign exchange futures.
He also pointed out that should increase the transaction body, to support domestic individuals to participate in the domestic foreign exchange market. And expand the two-way open to expand the participation of foreign institutions in the domestic market, to support domestic banks to participate in overseas markets, and promote the formation of the RMB exchange rate at home and abroad.