Another tightening of financial controls by the Chinese government has raised more questions about whether the government has a handle on its financial markets such as forex and equities.
The move came as China’s Premier Li Keqiang said there is no risk of a hard landing in the economy because the government is fully capable of supporting growth.
His comments came as news emerged of a tightening of foreign exchange controls by the central bank to try and slow the flow of money out of the country.
Mr Li told the World Economic Forum in Dalian in northeastern China that he was confident that the government would achieve its main economic targets this year.
“We will not be swayed by short-term fluctuations in the economy but we will not take it lightly either," Li said. “We are taking necessary measures of targeted, discrete and precise macro controls” to mitigate volatility and prevent spillovers,” newsagencies quoted Li as saying.
He said China will take steps to expand domestic demand and will implement policies to boost imports, comments which also echo those earlier this week from the Finance Ministry that the country would run a “proactive” fiscal policy – a hint that the government will use extra spending to combat any slowdown.
The Finance Ministry’s comments came after the poor trade figures for August were released on Tuesday (especially the fall in import volumes of key commodities).
Yesterday’s data showed consumer prices rose sharply in August, thanks to higher pork prices (but were steady on an underlying basis), but producer prices fell at their steepest rate for nearly six years as deflation gripped the sector for a 42nd month in a row.
So much for all China’s talk about wanting to make the yuan a global reserve currency – the country is doing its best to disabuse anyone of the idea that Chinese authorities are mature enough to handle the responsibility that comes with the idea.
The IMF earlier this year put off making the yuan part of the Special drawing rights scheme (which is the international reserve asset set up by the Fund in 1969). The IMF indicated the delay was needed so China could do more to bring itself up to the global standard needed for reserve asset/SDR status.
These included allowing the currency to be more market-driven and easing capital controls.
But the Financial Times reported yesterday that China’s State Administration of Foreign Exchange (or Safe which is the section of the People’s Bank of China in charge of managing the currency) has tightened controls over foreign exchange dealings (and not relaxed them).
"The Safe has ordered banks and financial institutions to pay particular attention to the practice of over-invoicing exports, used to disguise large capital outflows. The administration confirmed the existence of the memo, but declined to comment further,” the FT reported.
China has long imposed limits on the amount of foreign exchange that can be bought or sold by individuals and companies, but those controls have broken down somewhat in recent years as the Renminbi has become more widely used around the world. The extent of the breakdown can be seen in the way China’s foreign exchange reserves have fallen from nearly $US4 trillion in June 2014 to $US3.55 trillion in August.
The country has racked up more than $US400 billion of trade surpluses in that time, and while an estimated $US200 billion has been used in the past three weeks supporting the yuan after the ham-fisted ‘devaluation’ in mid-August, that still doesn’t fully explain the extent of the fall in the level of reserves (which are reported as a net figure only, with no other details provided). The reserves fell by a net $US94 billion in August (after accounting for the $US62 billion trade surplus and the funds spent supporting the yuan).
The Financial Times also reported that the central bank has now started supporting the currency in offshore yuan markets as well as inside China.
As well the central bank has come down hard on what it sees as currency speculation by companies and others who buy and sell currency in the forward markets (for something happening in the near future) and not the everyday spot market.
The FT says the central bank informed banks last week that it would soon impose a new 20% reserve requirement on all currency forward positions, in a move aimed at reducing heavy speculation on continued renminbi devaluation. (Remember it has been cutting the reserve asset ratios of banks in the domestic market to help maintain liquidity sucked out by its currency intervention and the flow of money out of the country.)
“All market participants will be required to deposit the equivalent of 20 per cent of their forwards book with the central bank for one year at zero interest.
“This will considerably increase the cost of currency hedging for Chinese companies, which had a total of $US1.2 trillion in outstanding foreign currency debt by the end of March and are widely expecting further devaluation in the renminbi (yuan),” the FT reported.
