China Eases Capital Controls As Dollar Weakens

In discussing the key overnight news in an otherwise quiet session, JPM writes that “the most important headline was prob. the one concerning China loosening some currency outflow curbs” so focusing on that, Reuters, and SCMP before it, reports that after months of draconian and ever tightening capital control, China’s central bank has relaxed some of the curbs on cross-border capital outflows it put in place just months ago to shore up the yuan currency.

Specifically, as of last week, the People’s Bank of China (PBOC) is no longer demanding that banks match outflows with equal inflows, the sources said. The South China Morning Post first reported the relaxation of the capital controls earlier on Wednesday.

There was no immediate comment from the People’s Bank of China when contacted by Reuters. The State Administration of Foreign Exchange (SAFE) did not have an immediate response to Reuters’ questions on the SCMP report. While expectations of further yuan depreciation have eased in recent months, opening a window for authorities to relax recent measures, Beijing is not likely to let go totally, said Raymond Yeung, chief Greater China economist at ANZ in Hong Kong. In addition to checking exchange rate expectations, the authorities were also using capital controls to control where Chinese money flows, limiting investments in foreign sectors deemed undesirable, he noted.

“The current macro environment obviously favors an easing of the (rules on) fund flows, but that doesn’t mean that it is going to have solved the structural issue of the mismatch between the corporate desire to go out versus the central government’s centrally-driven approach when they talk about offshore investment,” Yeung said.

This first easing of capital flught measures comes as “China’s leaders and financial markets feel more confident that pressure on the yuan and the country’s foreign exchange reserves has diminished, thanks largely to a pullback in the surging U.S. dollar.” It also comes at a time when increasingly more Chinese companies have complained they are unable to consummate offshore M&A due to the PBOC’s limit on how much capital they can park offshore.