On November 29, Chinese authorities stepped up measures on capital controls in response to ongoing downward pressure on the yuan, which recently fell to its lowest level in eight years. Despite efforts by Chinese authorities to support the currency’s value, record capital outflows have led to continued depreciation and fears of a depreciative spiral.
In the first nine months of 2016, Chinese outbound investment deals totalled $530.9bn, surpassing the record volume from 2015. This has placed a substantial downward pressure on the yuan, which has been further exacerbated by a hike in the value of the dollar. Speculation of higher interest rates following Donald Trump’s surprise victory in the US election have led to a surge in the value of the dollar and a corresponding depreciation of the yuan and the currencies of other emerging market economies.
[The] measures include restrictions to the size of outbound investment deals, large mergers and acquisitions
The rapid depreciation of the yuan has prompted fears that the value may spiral further due to a market-fuelled feedback loop. In a recent interview reported by Reuters, Wang Zhenying, a senior Chinese central bank researcher, said: “At the moment, the fall in the yuan’s exchange rate is shaping market expectations. Depreciation triggers capital flight, and capital flight exerts even bigger pressure on the yuan.” Chinese authorities have already supported the currency through a number of interventions using foreign currency reserves, but have now stepped up this effort by turning to capital controls.
Controls aiming to stem capital outflows include restrictions on transactions such as foreign direct investment. The State Administration of Foreign Exchange has changed its threshold level for the vetting of foreign transfers, now requiring transfers over $5m to gain special permission, according to sources for Reuters.
The measures also include restrictions to the size of outbound investment deals, large mergers and acquisitions. As such, China’s state-funded asset investment sprees will also be curbed, with state-owned enterprises now required to adhere to a $1bn limit for foreign real estate investments.
The success of these new measures is yet to be seen, and some industry commentators have questioned whether the efforts could inadvertently add to the speculative pressure. According to Jonas Short at NSBO, a Beijing-based policy research firm told the Financial Times: “The move happened now largely as a result of the high outflows in September… but it can be a bit of a whack-a-mole game. As soon as you try to stem outflows in one channel, they will find another and the overall anxiety of investors trying to get their money out will increase.”