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 World Bank to issue SDR bonds in China for first time

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Join date : 2011-08-09

PostSubject: World Bank to issue SDR bonds in China for first time   Sun Aug 28, 2016 12:08 pm

China seeks tighter rein on yuan-selling, capital flight

YUSHO CHO, Nikkei staff writer

The People's Bank of China.

SHANGHAI -- China is imposing new reporting requirements and other restrictions on currency transactions across its borders in an effort to curb capital outflows that could lead to volatility in the yuan.

It is not new for the People's Bank of China to provide "window guidance" to the country's financial institutions, particularly commercial and foreign banks, in such areas as lending practices. But the scope and detail of the new requirements will influence how banks and other financial institutions do business.
The central bank has been taking an especially hard line on capital outflows since June. One Chinese bank said it was pushed to abide by the central bank's guidance in July, around when the yuan began weakening against the dollar and reignited fears of capital flight.

Closing the gates

The PBOC provides different guidance by region, including in the cities of Tianjin, Dalian, Qingdao, Hefei, Wuhan and Shenzhen. In Guangzhou, banks are expected to report at the end of each month planned purchases of foreign currency by clients in the following month. They must also submit weekly purchase records at the start of the following week and check for errors when foreign companies transfer funds from China overseas.

The government is keeping an eye on large-scale money transfers, too. In Shanghai, authorities must be alerted in advance of any transfer abroad exceeding $50 million that also involves the purchase of foreign currency.

Repaying foreign-currency-denominated debt ahead of schedule has effectively been banned in Beijing on fears that debtors would start trading in large amounts of yuan for other currencies. Many regions also urge companies to make overseas payments using foreign currency already on hand.

Chinese foreign reserves have shrunk 20% from their peak in June 2014 to about $3.2 trillion. A further decline could damage the country's creditworthiness. The PBOC's stringent guidance "reflects the government's desire to curb capital outflows," a Chinese banking source said.

China hosts the Group of 20 summit in September, and the yuan joins the International Monetary Fund's Special Drawing Rights basket the following month. The government is eager to avoid any criticisms of economic policy at this time.

The window guidance seems to have helped: The yuan market started to settle down in the latter half of July. But how long the stability will last is unclear. Mainland China has seen a surge in imports from Hong Kong this year, which some say stems from funneling funds out of China by inflating import and export bills. Yuan-selling could pick up again in foreign markets.

China reports that real gross domestic product grew 6.7% on the year for the April-June quarter, the same rate as in the three months ended March. Calls for monetary easing are growing at home, putting downward pressure on the yuan.
Restrictions on interest rates have been reimposed in some parts of the country, ostensibly in the form of voluntary self-regulation by the banking industry. The government seems to be turning a blind eye to the potential negatives of its quest for stability in financial systems and the market.

Some intervention may be unavoidable, given uncertainties in the current market. But foreign players strongly hope that the yuan and the Chinese financial system will become easier to navigate. Pursuing stability at the expense of market reforms may only give them more reasons to take their money out of China.


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