Chinese regulators are stamping out moves by banks to shift renminbi out of the country as they attack one of the few loopholes remaining in the country's strict new capital controls regime.
The tightening is another setback for the Chinese government's larger strategy of internationalising its currency — a goal that has taken a back seat to stabilising capital outflows and the renminbi's depreciation against the dollar.
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According to several people briefed on rules introduced this month, banks in Shanghai must "import" 100 yuan for every 100 yuan they allow a client to remit overseas, ensuring no net outflows of the Chinese currency. Shanghai-based banks had been allowed to remit 60 yuan overseas for every 100 yuan they brought back into China.
The clampdown goes even further in Beijing where banks must import 100 yuan for every 80 yuan they remit overseas on behalf of clients, ensuring a net inflow into the capital. The People's Bank of China declined to comment.
Chinese regulators have been concerned about the renminbi's relatively rapid depreciation against the dollar, which they have slowed by selling down the country's foreign exchange reserves. To preserve China's forex stockpile, which stood at just over $3 trillion at the end of last year, the central bank and State Administration for Foreign Exchange have implemented a series of capital controls over recent months.
In November the PBoC and Safe introduced stricter vetting procedures for China-based companies that wished to remit foreign currency for overseas acquisitions. Dividend payments and shareholder loan repayments by foreign investors were also subjected to tighter scrutiny — as were forex purchases by Chinese citizens.
Remitting renminbi offshore, where it can be converted into foreign exchange, was one way to avoid new capital controls. Such transfers were also consistent with Beijing's desire to promote the renminbi as an international currency, by encouraging companies to use it for trade transactions, shareholder loan repayments and dividend remittances.
"Chinese importers are having trouble paying trade invoices denominated in renminbi," said one person briefed.
According to policy researcher NSBO, net renminbi outflows from China exceeded 265 billion yuan ($38.5 billion) in September but have since plummeted as Chinese regulators close the loophole. "The use of renminbi for foreign transactions, which had been used to evade capital controls, dropped sharply [in December] to its lowest level since September 2015," NSBO said in a report on Friday.
Overseas banks, whose domestic market share in China is tiny, have been more affected by the clampdown because they derive a higher percentage of revenues from cross-border business. "This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks," one banker said.
Bankers have also complained that the central bank and Safe are only communicating regulatory "window guidance" over the phone or during face-to-face meetings, rather than in writing.
They added that Safe has instructed banks not to inform clients why their overseas remittances are being rejected and is checking their net renminbi flows on a weekly basis, compared with every month previously.
"It's up to us to tell clients sorry, we can't let you do the transfer," the banker added. "But obviously the clients know what is going on. This is not a secret."