Yuan Soars Most In A Decade As China Moves To Relax Capital Controls

Just two days ago, we took another look at the various means by which Chinese citizens circumvent Beijing’s capital controls. As a reminder, Chinese are only allowed to move up to $50,000 from the country in any given year, presenting a problem for anyone trying to dodge an export-boosting, double-digit deval or for anyone just trying to smuggle a few million out to buy an overpriced penthouse in Manhattan. 

Previously, you could use your UnionPay card to “buy” a Rolex in a back alley in Macau, but Chinese authorities finally tired of that charade and cracked down on the UnionPay end-around last year. Thankfully, there’s “Mr. Chen” and his “yellow loafers”, tea, and Snickers bars. In short, as long as you know the right shady go-between, you too can pay Chen 3% to move your money to Hong Kong, where it will be out of Beijing’s reach and free to go where it pleases.

As we’ve noted on any number occasions, capital controls are to some extent counterintuitive. That is, the stricter the capital controls, the more people want to move their money out of the country. Here’s how we put it last month: “What better way to spark a capital exodus than with very vocal, and very effective capital controls. Just look at Greece.”

Indeed, China will likely need to completely liberalize the capital account in the coming years in order to pacify the IMF which is poised to throw Beijing a bone and grant its RMB SDR bid. Inclusion could lead to some $500 billion in reserve demand.

That helps to explain why overnight, the yuan soared the most in a decade after China moved to loosen capital controls with a trial program in the Shanghai free trade zone that would allow domestic individuals to directly buy overseas assets. The move marks another step towards capital account convertibility, thus bolstering Beijing’s bid for yuan internationalization. The result: