China cracks down on currency flow
Wednesday 30 September 1998
The move is part of a crackdown on foreign exchange abuses that are putting pressure on the Chinese yuan.
Wu Xiaoling, director of the State Administration of Foreign Exchange, said yesterday that foreign currency fraud and "disorderly capital flow" had increased this year, prompted by "psychological expectations" of a devaluation of the yuan.
The government in Peking is standing firm that there will be no devaluation this year, but Chinese companies and individuals have been increasingly keen to hoard dollars. It has always been illegal for Chinese firms to hold foreign earnings abroad, but previously this has not been a big issue.
Ms Wu also revealed yesterday that private foreign exchange holdings inside China had reached about $80bn, compared with the government's forex reserves of $140bn.
The rest of the world will support any moves to shore up the Chinese yuan, whose stability is seen as a lynch-pin in preventing further economic turmoil in Asia. Ms Wu reaffirmed yesterday that the economic fundamentals did not support the need for a devaluation, and that "devaluing the yuan will bring more disadvantages than advantages". However, she added: "Noone can promise whether a currency will devalue or not."
China's economy and rate of export growth have both suffered because of the crisis in Asia, but the trade surplus for the first eight months of 1998 was still US$31.4bn.
Yesterday's crackdown was aimed at businesses, not individuals, and may inconvenience foreign-invested enterprises in China as trade documents for customs declaration forms above $100,000 are scrutinised for irregularities. The Chinese yuan is convertible on the current but not the capital account, so trade deals are a means to circumvent currency controls.
Ms Wu said that "billions" of US dollars of false customs declaration forms had already been discovered, as people used false import documents to obtain foreign currency. "It is not beneficial to a country's economy if it is under attack by illegal capital flow," she said.
Ms Wu's measures are aimed at defensive moves by Chinese companies, who fear a devaluation. These include paying for imports in advance, delaying taking payment for export earnings, and paying off forex loans early. Inside China, the yuan has been weakening on the resurging black market, with up to 9 yuan to the US dollar in the south, compared with 8.28 for trade transactions.
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