China Quietly Revamps Tools for Controlling Capital Outflows

(Bloomberg) -- China has quietly revamped its tools for handling capital flows -- an issue that takes on added importance as the yuan slips near the key 7 a dollar level.

After many years of plugging loopholes in its safety net only in response to an imbalance, the currency regulator has gone on the offensive. The State Administration of Foreign Exchange has now put the onus on banks to more closely monitor and balance their foreign exchange businesses in line with the government's views.

The regulator has added more indicators and conditions for banks to consider so that they can preemptively control risks themselves. It has also made the weighting of their annual evaluations more flexible so that their performance during periods of greater outflows is given more importance.

On top of making China's foreign exchange activities more transparent, the new approach might ease jitters in a market where concern over a weaker currency is mounting. The yuan is headed for its worst month since July and some analysts believe a trade war escalation could drive it past the 7 per dollar level for the first time in more than a decade, potentially causing financial instability. The currency was little changed at 6.9010 a dollar as of 4:18 p.m. in Shanghai.

Read More: Yuan's Rough Month Sets Stage for China to Rethink Key 7 Level

“This is a standardized way for banks to see how to balance currency flows against the backdrop of China's shrinking current account surplus and the macro prudential framework,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. “By tightening the banks' compliance, this will indirectly limit the capital outflows, which will reduce pressure for the renminbi to weaken further.”

Chinese lenders will have to make changes to how they handle currency sales and purchases by individuals and corporations, SAFE said in its May 21 statement. Adjustments will also be required for cross-border payments and the new foreign debt that companies issue.

The broad revamp means the regulator might not have to issue informal instructions, known as window guidance, to individual banks as often as in the past.

Chinese policy makers have worked to tighten capital controls over the last few years following an exodus of funds due to the yuan's shock devaluation in 2015. The authorities implemented a slew of measures including limiting companies' overseas acquisitions and adding requirements for citizens converting yuan into foreign currencies.

To contact the reporters on this story: Livia Yap in Singapore at lyap14@bloomberg.net;Ran Li in Beijing at rli279@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, David Watkins

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