China's Mainland Forex Regulator Warns of Sharp Changes in Capital Movements

According to a report released by China's Forex regulator, the Chinese mainland should be prepared for big swings in speculative capital flows amid global economic uncertainties.

The State Administration of Foreign Exchange said the country could face pressure from large-scale hot money inflows as the economy got back on track and major economies persisted with loose monetary policies and low interest rates to fuel recovery.

The risk elements brought about by large capital outflows could not be ignored as the nation's recovery was not yet complete, the regulator said. "We should actively prevent big swings in either direction."

With the forex regulator already preparing to take steps to curb risks associated with cross border capital flows, this will certainly make it harder for overseas forex companies to gain foothold in what is already an extremely heavily controlled nation, which has many laws in place which are aimed at preventing foreign companies operating in China.

With these news steps in place, it could be argued that it will be even more challenging for Chinese residents who wish to trade with overseas companies to transfer their funds out of China in order to open a live account.

Net capital outflows in the first three quarters of last year exacerbated the mainland's economic slowdown while fears of inflation were sparked as inflows recovered in the fourth quarter.

Foreign exchange reserves increased by $128.9 billion last year, the smallest rise since 2004. Trade surplus and net foreign direct investment together amounted to $265.6 billion, pointing to substantial capital outflow last year.

Last year, banks bought $1.57 trillion in foreign currencies and sold $1.46 trillion, SAFE said.

The $110.6 billion net purchase was 58 per cent lower than the trade surplus and net foreign direct investment combined because the yuan was expected to depreciate in the first three quarters of last year, the regulator said.

"The [yuan] is now relatively strong, to some extent reflecting expectations of appreciation," it said.

In November 2012, Forex Magnates reported Bloomberg's introduction of live interbank pricing for the mainland renminbi (CNY) market, facilitating better pricing control and hedging of China related business.

Speaking on the subject of China's intention to control capital flows, Robert Minikin, an analyst at Standard Chartered, said "the yuan would trade at 6.10 to the US dollar domestically by the end of this year, a net appreciation of 2.1 per cent. Offshore, it would strengthen 2.3 per cent to 6.08 per dollar."

"The export-led trade improvement is expected to extend into this year, which is supportive of renewed yuan appreciation," Minikin said.

On Friday January 25, the People's Bank of China set the daily yuan exchange-rate fixing at 6.2805, the lowest level since January 9, spurring speculation that Beijing is aiming to cap gains as a slide in the yen makes Japanese exports more competitive.

The Chinese government exercises extremely strict enforcement with relation to movement of money, making it one of the obstacles that need to be overcome by overseas companies wishing to attract Chinese business. There were some signs that indicated toward SAFE freeing up some of this, as detailed by Forex Magnates on the subject of yuan options becoming available and being offered by some foreign banks, however in terms of financial trading, China still has still a long way to go before becoming anything like a free market.