“Just as China’s regulators are in the midst of attempting to dampen outflows of the renminbi in order to reduce depreciation pressure on the exchange rate, the currency appeared to be reaching greater intraday heights in relation to the dollar due to a glitch in the data. The currency seemed to move to a high of 7.49 to the dollar on December 5, reaching levels not seen since 2007, though closing at 6.87. The high value would have signalled stress in the currency market, due to China’s economic slowdown and capital outflows, possibly coupled with negative market perceptions of increasingly desperate capital controls and anticipation of further controls to come.
China has been battling capital flight since last year as a result of a less attractive investment environment. Declining economic growth and persistence of asset price bubbles in the financial system are the key culprits, compounded by bets on continued RMB depreciation. A recent Morgan Stanley report stated that cross-border RMB flows amounted to an average of $28 billion per month through October of this year. These accounted for half of total capital outflows.
In response, China’s government has been attempting to impose regulations that stop the bleeding. Bank loans drove net capital outflows last year, which justifies new measures that increase scrutiny of RMB loans made overseas. The new regulations state that firms lending overseas must register the loans with the State Administration of Foreign Exchange (SAFE) and keep the loan under a limit of 30% of net assets. Banks are also unofficially limited customers’ ability to purchase foreign currency. SAFE has recently begun examining overseas transfers valued at $5 million or more. This has strongly affected multinational companies, which have found themselves suddenly unable to move significant funds out of China. Formerly permitted to take $50 million of RMB or dollars out of the country, last week’s restriction of transfers to $5 million (a small amount for large multinationals) has firms feeling the pinch of regulations.”