Head of Foreign Exchange Watchdog Vows to Strengthen Fight Against Capital Flight

(Beijing) — China this year will intensify its crackdown on unlawful transfers of assets offshore, the country’s top foreign exchange official said. However, he downplayed concerns over full-blown capital controls.

Chinese authorities in recent months have taken a series of steps to curb capital outflows, which were fueled as investors sought greater returns on dollar assets as the greenback strengthened and pessimism about China’s growth increased. Such measures have spooked investors.

“Foreign exchange regulators will strengthen the supervision and fight against illicit practices,” said Pan Gongsheng, director of the State Administration of Foreign Exchange (SAFE).

These included “fraudulent corporate outbound investments, false profit remittances, obtaining foreign currency under forged trade pretenses, pooling quotas of others to purchase or sell foreign money, illegal buying or selling of foreign exchange, and moving assets overseas through fake trade or investment deals,” Pan said.

“Next, we will enhance the investigation into and the punishment of such violations of the law and regulations to maintain the healthy operations of the foreign exchange market,” he said in an interview with China Business News, published Monday.

The government has tightened restrictions on domestic company investments overseas since late last year. At the start of this year, it sharply raised the cost of borrowing yuan in the offshore market in order to clamp down on short selling of the Chinese currency.

The government has also required banks to strengthen the scrutiny of individuals’ requests for foreign currency, which has provoked complaints over the rigmarole of answering questions about where and how money will be spent, the protracted time to get cash, and even rejection of applications.

The measures seemed to have had an immediate impact. Chinese companies announced they had invested a total of $4.77 billion in 32 overseas mergers and acquisitions last month, according to figures from research firm Mergermarket. This was down from $11.82 billion in 25 deals a year ago, pointing to not only slumping overall amount of funds to be transferred, but also to a smaller average size of investments per deal.

“With the Chinese government’s recent clampdown on its flight of capital, deals larger than $1 billion would have a hard time getting through the State Administration of Foreign Exchange,” said Anjali Piramal, Mergermarket’s global head of content development, in a note last month.

He added that rising protectionist sentiment in Europe and the U.S. has also deterred Chinese investors, who are concerned that hostile attitudes may increase acquisition costs.

“The second half of 2016 already witnessed some of this slowdown, and it is expected to continue into this year,” Piramal said.

But Pan dismissed fears that policymakers may revive across-the-board capital controls.

“We will not close windows that are already open,” he said in the interview. “Foreign exchange management policies will not regress. … (It’s) even less likely that we will return to the old path of capital control.”

The Chinese currency depreciated about 6.5% last year against the dollar as investors sold yuan-denominated assets. The loss might have been even larger if Beijing had not intervened to sell its dollars to prop up the yuan’s value. That move has seen the country’s forex reserves, the world’s largest, fall to $2.998 trillion at the end of January — the first time the figure dropped below $3 trillion in nearly six years.

China’s depleting ammunition to defend the yuan’s value has sparked concern over how long this intervention can be sustained. This is giving rise to worries that policymakers may turn to more-aggressive steps such as restoring rules that require exporters to sell dollar receipts on the country’s foreign exchange market.

Contact reporter Fran Wang (fangwang@caixin.com)