Clamping down on speculation
The Chinese government has introduced a new set of rules for foreign currency purchases, which prohibit people from buying foreign currencies for certain purposes such as investing in real estate or buying some kinds of insurance. Investors and companies said they are unsure how the new rules will affect them specifically, though pessimism prevails. But experts noted that the policy will likely be temporary, and the government remains committed to its goal of opening up China's capital account.
The Chinese government has rattled the market by releasing a set of new rules restricting foreign exchange purchasing at the beginning of 2017, but it seems investors and market institutions still need time to digest the changes.
"The government just launched the rules, and we don't know how they will specifically affect us," said a real estate broker based in Manhattan, on condition of anonymity.
In a statement published on its website on December 31, 2016, the State Administration of Foreign Exchange (SAFE) stressed that it is improving the application process for foreign exchange purchasing. The new application form made it clear that domestic buyers could not purchase foreign exchange to engage in certain kinds of overseas investments such as real estate, insurance and stocks.
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, said those kinds of overseas investments have always been closed to domestic investors, but the government has "turned a blind eye" to violations. But such leniency has apparently ended, at least for the time being.
According to the SAFE statement, domestic buyers can purchase foreign currency for only seven reasons: tourism, education, business trips, relative visits, medical treatment, trade and non-investment insurance.
Currency buyers can be fined up to 30 percent of the amount traded if they use the currency for any purpose other than what they stated on the application form, according to the new SAFE rules.
Also, buyers who conduct illegal foreign exchanges will be blacklisted, and prohibited from buying foreign currency for several years.
"Those rules are emergency methods to deal with rapid losses of foreign reserves from capital outflows," Shao Yu, a senior analyst at Shanghai-based Orient Securities, told the Global Times on Thursday.
Domestic foreign reserves slumped to $3.05 trillion by the end of November, down 2.2 percent from the end of October.
Harder to disguise
The new SAFE rules will mostly affect people who want to invest in foreign assets such as property and insurance, experts noted.
Those overseas investments have become popular among domestic investors recently as the U.S. dollar has been strengthening against the yuan since mid-2015. The yuan depreciated nearly 7 percent against the greenback in 2016.
Starting from about 2012, Chinese investors flocked to the U.S. to buy homes, said the Manhattan real estate broker. The purchasing trend peaked over the last two years.
"Some new property developments in the U.S. have websites in Chinese," he told the Global Times on Wednesday.
Some New York-based real estate agents are studying up on feng shui to better serve Chinese clients, the broker said. Feng shui is the traditional Chinese practice of determining the location of a house so it brings those who live there good fortune and spares them bad luck.
According to the broker, most home buyers in China accumulate foreign currency by using the $50,000 quota multiple times, a strategy called "ant moving." They tended to gloss over the true purpose of the exchange, often declaring it to be tourism.
The strategy should no longer work because the new application system for foreign exchange purchasing asks buyers more detailed questions about their purposes, making it harder for them to disguise their true intentions.
A Shanghai-based real estate agent surnamed Yu said that the government might tighten the policy even more in the future. "At present, ant moving should still work as it takes time for the new rules to be fully executed, but in a few months it might be different," Yu told the Global Times on Thursday.
According to domestic media reports, there are agencies that can help clients circumvent foreign currency exchange rules, though the Manhattan broker said formal agencies wouldn't provide such kinds of services.
Apart from the real estate sector, investors that intend to buy overseas insurance are also facing a bottleneck.
A Beijing investor surnamed Zuo bought a Hong Kong insurance policy in 2015 and has been considering buying more this year, but she doesn't completely understand SAFE's new rules. "I need to consult more people before I decide," she told the Global Times on Thursday.
"I don't think the rules will eliminate such investments [like buying property overseas], but they will curb those activities," Zhou told the Global Times on Wednesday.
Temporary measures
Zhou nevertheless stressed that the government implemented the rules to curb speculative use of foreign currency, rather than block the normal use of foreign currencies for business or everyday life.
Zhou believes this because the government didn't change the $50,000 annual quota for individuals.
Han Jinbao, a Shanghai-based resident whose daughter is studying in the UK, said that the $50,000 annual quota is "more than enough" to cover her daughter's living expenses abroad.
"Because the government didn't change the quota, the new rules don't really affect us," Han told the Global Times on Friday.
Zhou predicted that the tighter rules will be temporary.
"Now that the country's foreign reserves are a bit tight, the government has to be stricter about purchases, but when the yuan stops depreciating, the government will change its stance accordingly," Zhou said.
Zhou also noted that the restrictive policies on foreign currency purchasing runs counter to the government's goal of liberalizing the country's capital account.
"I don't think the government will change its goal of opening up China's financial market. In the longer term, people will have more freedom about how they can use foreign currency," Zhou noted, adding that the $50,000 annual quota should eventually be removed.
Shao said that whether or not China will loosen its grip on foreign exchange purchasing depends on how long the U.S. dollar will remain strong.
