Winton Dong

    dht620@sina.com

    LATEST official data showed that the foreign exchange reserves of China fell to about US$3 trillion at the end of 2016.

    China’s dollar-dominated foreign reserves reached its climax in April 2014 at nearly US$4 trillion. The drastic drop came amid a strong U.S. dollar rally with interest hikes by the Federal Reserves last year, the improvement of U.S. economic fundamentals and a continuous depreciation process of the Chinese yuan in recent months.

    With Donald Trump’s massive infrastructural construction stimulation plan to boost government investment in the United States, the Fed will likely embark on a steeper path of interest hikes this year, with three or more rate hikes possible in 2017 to avoid inflation in the country. Given the current international business atmosphere, a Goldman Sachs report forecasts that the exchange rate between the dollar and the yuan may hit 7.30 by the end of 2017, as China is on a bumpy road of economic recovery.

    On the one hand, depreciation of the yuan reflects China’s strong determination toward a free floating exchange rate system after the Chinese currency joined the reserve basket of the International Monetary Fund as a fifth currency in October last year.

    On the other hand, continuous depreciation of the Chinese currency will surely make large-scale speculative capital outflow a tendency in China, thus bringing about a serious hazard to the Chinese economy. Meanwhile, with the depreciation of the yuan, less business deals will use it as the settlement currency in international trade, thus slowing down the internalization pace of the yuan. Actually, China is not the only country that has witnessed currency depreciation and speculative money outflow. Many emerging economies such as Brazil and South Africa, and even developed countries like Australia and Eurozone nations have also encountered the same problem.

    A recent Morgan Stanley report revealed that an average US$28 billion per month flowed out of China via the cross-border yuan settlement channel in 2016, accounting for half of the monthly capital outflows, in contrast with the declining offshore yuan deposits. That means that Chinese money flowing to other countries has been converted to foreign currencies rather than promoting the use of yuan offshore.

    The regulatory bodies have come to realize the hazard brought by speculative behavior through moving money out of China and have taken some concrete measures to tighten control and fend off risks in those illegal outbound investments.

    Compared with other methods, issuing loans overseas is a relatively simple way for companies to move money out of China. To block the loophole, the People’s Bank of China drew up new guidelines in December 2016 to strengthen inspections of domestic companies that make yuan loans overseas. Lenders must register with local foreign exchange regulatory bodies in China before issuing loans abroad, and the amount of the loans should not exceed 30 percent of net assets of the lender.

    Meanwhile, the National Development and Reform Commission, the People’s Bank of China and two other government organs will also conduct joint reviews on outbound investments of more than US$200 million made by State-owned enterprises. Outbound investments in real estate, hotel, entertainment, and sports sectors will be specially scrutinized because the government wants to make sure that its money is wisely invested and will generate profits in a certain period of time.

    China has not changed the annual quota of US$50,000 for foreign exchanges purchases by each individual. However, to prevent individuals from illegally transferring their assets or money through investment activities in overseas markets, new rules have also been introduced since the beginning of this year. Chinese residents now need to fill in an application form indicating the purpose of foreign exchanges purchases. The applications include nine purposes, including travel abroad, business trip, study overseas, visiting relatives, medical care and others. However, buying real estate and life insurance investment are not allowed.

    Despite the fact that speculative outflow of money poses a great danger to the Chinese economy, it is understandable that institutional investors and individuals try to diversify their assets as the yuan continues to depreciate. While reining in risks in overseas projects, the Chinese Government should also take pains to calm down the market and give investors more confidence with the Chinese economy by maintaining steady growth.

    Vice Governor of the People’s Bank of China Yi Gang recently said that he is confident in the long-term stability of the yuan under a flexible floating system. According to Yi, international markets should observe the yuan’s fluctuation against a basket of currencies instead of only focusing on its exchange rate against the dollar. “As the Chinese economy recovers and institutional reforms improve the business environment, capital that has left China will come back,” he said.

    (The author is the editor-in-chief of the Shenzhen Daily and guest professor of Shenzhen University with a Ph.D. from the Journalism and Communication School of Wuhan University.)