China is the world’s second largest economy and a vital player on the global stage. An economic recession or financial crash in China would be felt around the world. Investors not paying at least some attention to China are not properly managing risk in today’s globalized financial markets.
At Young Research, we have been following the slow, bubbly capital exodus from China. China’s foreign currency reserves are down over $1 Trillion over the last 17 months. Last year after allowing the yuan to depreciate to almost 7 per dollar, China put the brakes on further depreciation. That was paid for by spending foreign currency reserves. Now, as the FT reports, China is attempting to stem further depreciation of the yuan with additional capital controls. This doesn’t have a good long-term look.
The latest regulations posted by the State Administration of Foreign Exchange late on Thursday include requirements for additional documentation when foreign companies remit profits above $50,000 from direct investments in China back to their home countries. The Financial Times reported in December that some foreign companies faced delays repatriating dividends.
The new regulations state that companies trying to move money into investments offshore will have to clarify the source of the funds and provide further details about their plans. Some international private equity deals in China have been delayed as banks only slowly dole out permission for the Chinese buyer to convert currency, people affected by the pace of approvals have said.
Foreign banks have complained that the Chinese regulator’s practice of issuing “window guidance” to banks without publicising the new orders has made it difficult to explain to their clients what’s going on. The resulting leaks of unpublished regulations and uncertainty over how far the capital controls will extend has shaken some investors’ confidence in China.
Read more here.
Jeremy Jones, CFA
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