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China forex rules mark shift in regulatory emphasis

(Xinhua)
Updated: 2008-08-08 11:35

New rules to tighten controls on the transfer of foreign currencies in and out of China, issued late Wednesday with immediate effect, mark a shift in regulatory emphasis.

The old foreign exchange rules focused on controls on outflows, while the new regulations cover both capital inflows and outflows and try to achieve a balance between the two, according to the State Administration of Foreign Exchange (SAFE).

"As China's economy becomes more internationalized and the movements of international capital accelerate, it is necessary to improve the supervision system of cross-border capital movements and increase risk prevention," SAFE said in a statement.

The rules were revised in early 1997, around the time of the Asian financial crisis.

The new rules give the Chinese authorities more power to investigate currency movements and provide heavy penalties for unauthorized currency transfers and conversions.

Unauthorized inward or outward foreign currency transfers would face fines up to 30 percent of the capital involved.

Analysts said the new rules would stem illegal inflows of speculative international capital, or "hot money", which has been attracted in large amounts by an undervalued yuan. Such inflows are believed to have fueled inflation.

Over the past several months, the government has taken a series of measures to blunt the impact of "hot money," amid the explosive growth of its foreign exchange reserves, which have soared beyond what can be explained by trade and investment flows.

According to SAFE, as of the end of July, foreign exchange reserves stood at $1.81 trillion.

The tighter rules, the latest step in the process, would help curb "hot money" inflows and lead to a deceleration in the yuan's appreciation in the short run, said Li Feng, a senior analyst at China Galaxy Securities.

The yuan was set to trade at 6.85 against the US dollar on Thursday, the eighth consecutive day of decline. Its recent weakness, however, was a result of the strengthened US dollar, said Tan Yaling, a research analyst with the Bank of China.

Li echoed Tan's comment, adding that the yuan's decline had also taken place because the currency had gained too much in the first half, which had made exporters' situation difficult.

Li expected the yuan to appreciate more slowly for the rest of the year and said it would gain 8-10 percent against the US dollar in all. So far this year, the yuan has risen more than 6 percent against the US dollar.