China Warns May Dump Treasuries To Keep Yuan Stable, Prepares More Capital Controls
In China, announcing new (and ever more ineffective) capital controls has become a daily thing.
Last week, Beijing unveiled its latest set of capital controls according to which Chinese banks would be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People’s Bank of China (PBOC), down from the current level of 200,000 yuan. Cross-border transfers more than 200,000 yuan by individuals would also be subject to the report process.
Then, overnight, China’s currency regulator, the State Administration of Foreign Exchange (SAFE) added its own round of capital control limitations, when it announced it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. As a result, while the regulator kept existing quotas of $50,000 of foreign currency per person a year, citizens faced draconian new currency exchange disclosure requirements, requiring foreign currency buyers to indicate how they plan to use the money and when they plan to spend it. Additionally, mainlanders would be restricted from using the FX proceeds to buy overseas property, securities, life insurance or other investment-style insurance products. In fact, among the list of approved uses of funds are tourism, schooling, business travel and medical care. Which means any offshore asset purchases have been effectively limited.
What made the above capital controls especially amusing is that as Xinhua reported over the weekend, “the policy stoked worries that the government is trying to impose capital control in a disguised form.” And since the official admission of capital controls would only lead to even more panicked outflows, PBOC economist Ma Jun intervened, saying that the new cash transaction rules, i.e. capital controls, are “not capital control at all.“
We leave it up to readers to decide what that means.
Then, fast forward two days when China, no longer bothering with euphemisms, admitted that it has “studied possible scenarios of yuan exchange rate and capital outflows in 2017 based on models, stress tests and field research, and is preparing contingency plans”, Bloomberg reported citing people familiar with the matter.
Among the “contingency plans” are proposals recently suggested by such banana countries as Turkey and Venezuela, which include China’s government asking state-owned enterprises to temporarily convert some foreign-currency holdings into yuan, said Bloomberg’s sources, who are clearly mostly interested in the market’s response to this particular Bloomberg-mediated trial balloon
Bloomberg adds that financial regulators have already encouraged some SOEs to sell FX under current account.
But most troubling is the admission that “China may further cut U.S. Treasury holdings in 2017 if needed to keep exchange rate stable; size of reduction depends on capital outflows and FX market intervention,” or in other words, the worst-case scenario which so many serious “economists” have said can not conceivably happen.
Well, China is now actively considering it, which means that should the Yuan continues to slide, Beijing is close to implementing it.
Not unexpectedly, as a result of this latest daily escalation in China’s capital controls, the offshore Yuan is now surging, and is back under 6.95, up nearly 200 pips on the session so far.