“…Beijing’s latest drive to stamp out unauthorised capital inflows is likely to be no match for resourceful speculators determined to bring money into China to catch the wave of a rising yuan, bankers and officials say…”

By Alan Wheatley and Eadie Chen
Source: Reuters

Beijing’s latest drive to stamp out unauthorised capital inflows is likely to be no match for resourceful speculators determined to bring money into China to catch the wave of a rising yuan, bankers and officials say.

China’s currency regulator late on Wednesday ordered exporters to start parking their revenues in special accounts so banks can cross-check with customs data that their trade invoices are backed by genuine shipments and are not being inflated.

Padding export invoices so firms can remit more foreign currency is a time-honoured way of getting round China’s capital controls, and the initial reaction on Thursday was that it would take more than souped-up computer controls to end the practice.

“If an export-import company wants to make a fake invoice or a fake trade, it’s not so difficult,” a Beijing banker said.

The new procedures introduced by the State Administration of Foreign Exchange (SAFE) should in theory spot such ruses.

“This sounds a warning bell to those who have been bringing money into China this way,” said Zhao Xijun, a finance professor at China Renmin University.

But the banker said that, while the latest administrative hurdles would necessitate more creative shuffling of money among various accounts and subsidiaries, they would not be insuperable.

“You’ll just face some difficulty making the financial data more consistent within your company, that’s all,” he said.

An official at the National Development and Reform Commission (NDRC), China’s main planning agency, was also sceptical.

“It’s a big undertaking for SAFE to set up such an inspection system. But I doubt it’ll be very effective in curbing hot money inflows,” the official said.

Official Doubts

Even if it becomes tougher to use the trade channel, the official said speculators can bring in money by exaggerating their planned foreign direct investments or by simply remitting money using individuals’ bank accounts.

Chinese and foreign residents may buy or sell $50,000 a year, while Hong Kong residents are allowed to buy 20,000 yuan ($2,919) a day and to remit 80,000 yuan a day to the mainland.

Indeed, Yi Gang, a central bank vice governor, said in March the experience of other countries suggested that capital controls were often ineffective.

“Sectoral capital controls have a very limited effect in an open economy and cannot block off all capital flows, which can always flood in through uncontrolled channels,” he said.

A Ministry of Commerce official agreed it would be extremely difficult to enforce hot-money checks because it would involve verifying contracts agreed between buyers and sellers.

“But this policy at the very least gives relevant departments a basis for enforcement,” he said.

Behind SAFE’s crackdown is consternation in official circles at the never-ending surge of capital into China.

The country’s foreign-exchange reserves jumped $268.8 billion in the first five months. But the trade surplus and foreign direct investment accounted for just $121.3 billion of the increase — a strong indication that money is pouring in through other channels in anticipation of a further rise in the yuan.

“Speculative capital will continue to find ways to take advantage of this sure bet if the government is leaving the currency regime unchanged,” Sherman Chan, an economist at Moody’s Economy.com, said in a note to clients.

In the absence of a significant one-off currency revaluation, she said the new steps could be no more than a band-aid.

High Yuan

The People’s Bank of China, which tightly controls the yuan, or renminbi (RMB), let the currency rise on Thursday to 6.8510 per dollar, the highest level since it abandoned a peg to the dollar three years ago in favour of a managed float.

The yuan has now risen more than 20 percent against the dollar in the past three years. But the Beijing banker, echoing the view of most economists, said he felt the exchange rate was still undervalued considering prices inside and outside China.

“I can’t see any factors to stop or slow the RMB’s appreciation in the second half of the year,” he said.

However, with China’s vast export sector slowing, critics say the pace of climb this year has been too rapid — hence the attempt to brake illegal inflows.

“There’s only very limited room left for China to appreciate the yuan, otherwise it’ll be too much for the economy to bear,” the NDRC official said.

Chan with Moody’s Economy.com said SAFE’s verification procedures could be lengthy given the huge volume of Chinese trade. In that case, exports will slow, dampening growth.

But a manager with Guangdong Nanhai Light Industrial Products Imports and Exports Co Ltd, which exports a wide range of products from toys to bricks, was more relaxed.
“It sounds like another procedure we have to go through,” he said.