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The Chinese government appears to be finally planning some foreign exchange control measures to prevent rapid CNY depreciation. Amongst others, exporters are to be forced to sell their US dollar earnings, according to some local media.
During prevailing developments in EMFX struggle against the robust dollar, the foreign exchange controls are a typical policy response in emerging economies when their currency is under great pressure to weaken due to potential threats throughout 2017, predominantly, FED’s hawkish guidance and Trump’s fiscal policy to bolster US manufacturing and reforming in US taxation. Should there be any truth to this news (there are rarely official announcements in China) that would be a sign that the government in Beijing is very concerned about the continued flight of capital.
During early December 2016, Malaysia’s central bank also declared that exporters can only retain up to 25% of export proceeds in foreign currency. However, after the new policy, USDMYR still illustrates an upward trend, which clearly suggests that the administrative policies won’t alter the market expectations. That is unlikely to be any different in the case of CNY.
Beijing should, thus, think carefully whether it really wants to implement such measures contemplating the considerable consequences and side effects. Companies that are involved in foreign trade also need foreign currency. But how are officials going to decide what the USD requirements are going to be to run a certain business? The measures are likely to lead to a large amount of red tape and are likely to impair foreign trade.
Above all foreign investors, in particular, will recognize that getting money out of China might become even more difficult if even Chinese exporters have to sell their foreign currencies to the central bank. And of course, a measure of this nature would be suited to fuelling concerns about China’s situation on the market. In the end, the measures might create even more depreciation pressure.
