Gov't tightens controls to stem capital outflows
China's top foreign exchange regulator reaffirmed late Tuesday its commitment to support domestic companies investing in overseas markets as long as their activities are in line with relevant regulations.
The State Administration of Foreign Exchange (SAFE) said in a post online that it "always supports qualified and capable domestic companies to carry out foreign direct investment (FDI) that is real and in line with related regulations."
SAFE also stated that it will monitor outbound FDI and crack down on fraudulent activities to ensure sound and orderly growth in FDI.
The comments followed a report on Tuesday that suggested SAFE is stepping up measures to stem capital outflows after the yuan hit its lowest point in more than eight years.
The SAFE has begun vetting transfers abroad worth $5 million or more and is stepping up scrutiny of major outbound deals, including those with prior approval, Reuters reported, citing sources.
Capital outflows through both legal and illegal channels have added to pressure on the yuan. The currency has depreciated nearly 6 percent against the US dollar so far this year and many traders are betting on further losses, raising the specter of more capital flight.
The new rules would apply to transfers abroad under the capital account for transactions such as portfolio or foreign direct investment, and they could knock some momentum from China's overseas asset acquisition spree, analysts said.
Chinese outbound investment deals totaled $530.9 billion in the first nine months of 2016, surpassing 2015's record volume and helping China outstrip the U.S. as the top acquirer for foreign companies, according to Thomson Reuters data.
"The new rules will have a very big impact on outbound deals," said Luke Zhang, a partner at Zhong Lun Law Firm, who expects the number of deals to go down "quite a lot,"
"Previously, only forex transfers worth $50 million or more needed to be reported. Now, the threshold has been drastically lowered to $5 million, and that covers both foreign currency and yuan," said one of the sources with knowledge of the rules.
"All we can do is ask clients to be patient, and tell them that the transaction is being vetted by the SAFE for authenticity and may not be approved," the source said.
One of the sources said even if an outbound investment had already obtained approval to buy foreign exchange, but the money had not been fully transferred, the remainder of the quota was now subject to further approval if it was more than $50 million, a "large sum."
