Beijing is closely monitoring foreign exchange activities in fear of potential capital outflows triggered by the U.S. Federal Reserve’s approval of interest rate hikes.
China’s State Administration of Foreign Exchange (SAFE) said in a statement on Wednesday that it will ensure a stable operation of the forex market.
“We’ll strengthen the monitoring and macroprudential management of the forex market, and guide market entities to use exchange-rate hedging tools more widely to actively prevent and defuse the risks of external shocks,” SAFE said in the statement.
The forex regulator’s move came after the Financial Stability and Development Committee, a financial regulatory body under China’s cabinet, on Wednesday instructed government agencies to respond swiftly to market concerns, and said that any policy that could have a significant impact on the capital market should be coordinated with financial regulatory departments in advance.
Concerns have emerged over capital outflows after the U.S. Fed approved its first interest rate hike in more than three years, raising the federal funds rate by a quarter of a percentage point to a target range of 0.25% to 0.5%. Several more rate increases may also be in the pipeline, according to the Fed committee.
Analysts from China Merchants Securities said Thursday in a research note that China’s current capital outflow pressure mainly comes from the global risk aversion sentiment and the worsening liquidity environment amid the Russia-Ukraine war, and the narrowing interest rate gap of China and the U.S. — a key factor that drives international capital flows.
Chinese authorities are worried that “a lot of its domestic money will go offshore immediately,” said Andrew Sullivan, founder and writer for Asianmarketsense.com, in an interview with Forkast, adding that Chinese investors are only allowed to convert up to US$50,000 annually.
However, Sullivan said most Chinese retail investors don’t really trade in foreign markets.
“They trade the home market still. They just like having it diversified in case something happens,” Sullivan said. “Most Chinese retail investors are not confident enough about putting their money into Europe or into the U.S. because they don’t know about the companies that well.”
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For years, China has implemented tight control over capital outflows. “They don’t want the current capital within China to be able to leave whenever people want to move it because that would destroy the domestic economy as they wouldn’t be able to control their monetary policy,” Andrew Collier, managing director of Orient Capital Research, previously told Forkast.
Richard Turrin, a Shanghai-based fintech consultant, said that while the e-CNY is still only in use for domestic trials at present, he agrees that in the future any outflows that attempt to take advantage of rate hikes could easily be curtailed by the fact that the digital yuan is a “controllable currency.”
“It is likely that smart contracts could be used with larger value [of] e-CNY international transactions to make it usable at levels that would cause it to be flagged under traditional currency control,” Turrin said, adding that this would allow China to effectively increase foreign usage of the e-CNY as both the recipients and the use for the cash would be known.
Sullivan of Asianmarketsense.com said China is keen to control as much as possible. “If you go to a digital RMB, that gives them exactly that. They can see exactly what you are spending your money on and they can take and make policy appropriately.”
With the introduction of the e-CNY, such tight capital control could be slowly loosened up in the future, Stanley Chao, managing director of Asian business strategy firm All In Consulting, previously told Forkast.
“Cash or paper money posed a money-laundering issue, thus prompting China to impose severe cross-border controls,” Chao said. “But with the e-CNY and less cash transactions, China can easily monitor cross-border transactions and thus allow more funds to flow without having to worry about money-laundering.”
Ningwei Qin contributed to this report.