China has taken steps to tighten its checks on citizens exchanging foreign currency ahead of anticipated renewed downward pressure on the renminbi in the new year, according to a Financial Times report.
The county’s policymakers have recently clamped down on capital flows leaving the country and have imposed new restrictions on outbound corporate acquisitions and investments, as part of an attempt to prevent the renminbi from steep falls in the future after depreciating nearly 6 percent versus the dollar in 2016.
The State Administration of Foreign Exchange has asked banks to improve their standards for verifying customers’ identities and to report large or questionable transactions, pointing out that “there have been leaks in China’s system of personal foreign exchange purchases,” and that “individuals and companies have avoided capital controls on overseas investments by disguising their transactions as goods purchases”.
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China’s capital controls limit individuals to purchasing no more than $50,000 each year in foreign currency, a quota which reset on 1 January. The renminbi could come under renewed pressure to weaken when individuals use their fresh quotas once the banks reopen this Tuesday.
The central bank wants to ensure that the renminbi’s value stays above the red line of RMB 7 per dollar, which is considered a symbolic number for China’s policymakers. The onshore renminbi was trading at RMB 6.94 to the dollar at the weekend.
Whilst guarding the RMB 7: USD 1 line, central bankers are also trying to prevent foreign exchange reserves falling below the $3 trillion mark. The two goals are acknowledged to be hard to achieve simultaneously without the help of capital controls.
China’s foreign reserves fell by nearly $200 billion last year after the central bank sold dollar reserves in order to prop up the value of the renminbi against the dollar.