LexisNexis(TM) Academic - Document
LexisNexis(TM) Academic - DocumentCopyright 2005 The Financial Times Limited
Financial Times (London, England)
July 26, 2005 Tuesday
London Edition 1
SECTION: COMMENT & ANALYSIS; Pg. 6
LENGTH: 866 words
HEADLINE: Revaluation set to challenge China's capital controls: Beijing is taking action to minimise the effects of a possible speculative inflow of foreign currency after unpegging the renminbi
BYLINE: By MURE DICKIE and GEOFF DYER
BODY:
Ever since Chinashrugged off the currency crises that swept through Asia in 1997, its capital controls have been praised for keeping its currency steady and insulating the country from economic troubles.
However, China's restrictions on short-term capital movements could now come under a fresh onslaught, following the government's decision to abandon the renminbi's peg to the US dollar and move to a more flexible exchange rate regime.
With Zhou Xiaochuan, governor of the People's Bank of China, the central bank, signalling that last week's 2.1 per cent revaluation against the dollar was only an "initial step", Beijing runs the risk of provoking a massive inflow of speculative funds.
It is unclear how well the country's increasingly leaky curbs on capital movements will cope. But there is no question that China's government is determined to remain in control.
"Any developing country with a currency that is not international has to be particularly cautious at a time when it is adjusting its exchange rate mechanism," says Mei Xinyu, an expert on currency controls at the Chinese Academy of International Trade and Economic Co-operation under China's commerce ministry.
"It's impossible to open up the systems of capital control and exchange rate setting at the same time," he says.
Calculating how much money slips past capital controls is guesswork in any country. It is harder still in China because of the practice of "round-tripping", where companies take funds offshore, only to bring them back for the tax benefits enjoyed by some foreign investments.
China's foreign exchange reserves stand at Dollars 711bn (Euros 590bn, Pounds 408bn), of which some economists say Dollars 100bn is the result of speculative capital inflows.
A government report in February said that between August and December, the authorities raided 155 underground banks involved in trading Dollars 1.5bn in foreign currency. But according to Caijing, an investigative magazine, a government inspection of the banking system last year uncovered 4.3m suspicious foreign currency transactions involving Dollars 1,200bn.
Anecdotal evidence also suggests widespread abuse of the rules. The China operations of cross-border companies can overcharge offshore units for goods, as a way to bring in funds. Ventures can also use investment in new Chinese plant as cover to bring in funds they pump into property or other assets with little connection to their business.
Media reports say some people have bought fake Chinese artefacts as a ruse for bringing in foreign currency.
Meanwhile, late last year, police in the eastern city of Qingdao arrested a South Korean man accused of operating an illegal foreign exchange business that had turnover of Rmb240m (Dollars 30m, Euros 25m, Pounds 17m) a year.
Even if China were to receive substantial capital inflows following the shift in its currency regime, however, some economists say the impact might be limited. Capital controls cannot stop all speculative flows, but they slow them down. China is unlikely to suffer the violent capital movements that have destabilised other developing countries.
The central bank has successfully "sterilised" incoming funds over the last two years with bill issues, restraining inflation. Indeed, overcapacity in many industries means that at present the risk could be deflation.
Moreover, holding renminbi assets might not be the sure bet some investors hope. The stock market has slumped this year and many regional housing markets have cooled.
Many analysts also believe the government will continue to take a cautious approach to the level of the currency, which would mean only modest returns for anyone with money in a Chinese bank.
In spite of the concerns over speculative fund inflows, the biggest worry for policymakers remains the possibility of outflows if the economy slows or the prospects for renminbi revaluation diminish.
Beijing is also nervous of the continuing power of hedge funds that took on Asian central bankers in 1997. For this reason, according to Li Deshui, a member of the central bank's monetary committee, China will not make its currency fully convertible for at least five years because it worries hedge funds may force the renminbi to plunge. "There's more than Dollars 800bn to Dollars 1,000bn of hedge funds in the world and the Chinese financial system is relatively weak," Mr Li said in an interview with Bloomberg. "If the (renminbi) becomes fully convertible it would be attacked by these hedge funds."
To ease upward pressure on the renminbi, Beijing has in recent years allowed business more freedom to export capital, but officials have not stopped worrying about the risks of being too lax.
One reason can be found in the spectacular boom enjoyed by casinos in south-east Asia, which is partly being sustained by Chinese travellers, who are banned from betting at home, illegally taking money out of the renminbi area.
The authorities have begun to take steps to prevent money laundering, requiring banks to report suspicious transactions. Legislation on money laundering is also being prepared. However, experts say many banks lack the operational structure to monitor funds transferred between regions.
LOAD-DATE: July 25, 2005
Financial Times (London, England)
July 26, 2005 Tuesday
London Edition 1
SECTION: COMMENT & ANALYSIS; Pg. 6
LENGTH: 866 words
HEADLINE: Revaluation set to challenge China's capital controls: Beijing is taking action to minimise the effects of a possible speculative inflow of foreign currency after unpegging the renminbi
BYLINE: By MURE DICKIE and GEOFF DYER
BODY:
Ever since Chinashrugged off the currency crises that swept through Asia in 1997, its capital controls have been praised for keeping its currency steady and insulating the country from economic troubles.
However, China's restrictions on short-term capital movements could now come under a fresh onslaught, following the government's decision to abandon the renminbi's peg to the US dollar and move to a more flexible exchange rate regime.
With Zhou Xiaochuan, governor of the People's Bank of China, the central bank, signalling that last week's 2.1 per cent revaluation against the dollar was only an "initial step", Beijing runs the risk of provoking a massive inflow of speculative funds.
It is unclear how well the country's increasingly leaky curbs on capital movements will cope. But there is no question that China's government is determined to remain in control.
"Any developing country with a currency that is not international has to be particularly cautious at a time when it is adjusting its exchange rate mechanism," says Mei Xinyu, an expert on currency controls at the Chinese Academy of International Trade and Economic Co-operation under China's commerce ministry.
"It's impossible to open up the systems of capital control and exchange rate setting at the same time," he says.
Calculating how much money slips past capital controls is guesswork in any country. It is harder still in China because of the practice of "round-tripping", where companies take funds offshore, only to bring them back for the tax benefits enjoyed by some foreign investments.
China's foreign exchange reserves stand at Dollars 711bn (Euros 590bn, Pounds 408bn), of which some economists say Dollars 100bn is the result of speculative capital inflows.
A government report in February said that between August and December, the authorities raided 155 underground banks involved in trading Dollars 1.5bn in foreign currency. But according to Caijing, an investigative magazine, a government inspection of the banking system last year uncovered 4.3m suspicious foreign currency transactions involving Dollars 1,200bn.
Anecdotal evidence also suggests widespread abuse of the rules. The China operations of cross-border companies can overcharge offshore units for goods, as a way to bring in funds. Ventures can also use investment in new Chinese plant as cover to bring in funds they pump into property or other assets with little connection to their business.
Media reports say some people have bought fake Chinese artefacts as a ruse for bringing in foreign currency.
Meanwhile, late last year, police in the eastern city of Qingdao arrested a South Korean man accused of operating an illegal foreign exchange business that had turnover of Rmb240m (Dollars 30m, Euros 25m, Pounds 17m) a year.
Even if China were to receive substantial capital inflows following the shift in its currency regime, however, some economists say the impact might be limited. Capital controls cannot stop all speculative flows, but they slow them down. China is unlikely to suffer the violent capital movements that have destabilised other developing countries.
The central bank has successfully "sterilised" incoming funds over the last two years with bill issues, restraining inflation. Indeed, overcapacity in many industries means that at present the risk could be deflation.
Moreover, holding renminbi assets might not be the sure bet some investors hope. The stock market has slumped this year and many regional housing markets have cooled.
Many analysts also believe the government will continue to take a cautious approach to the level of the currency, which would mean only modest returns for anyone with money in a Chinese bank.
In spite of the concerns over speculative fund inflows, the biggest worry for policymakers remains the possibility of outflows if the economy slows or the prospects for renminbi revaluation diminish.
Beijing is also nervous of the continuing power of hedge funds that took on Asian central bankers in 1997. For this reason, according to Li Deshui, a member of the central bank's monetary committee, China will not make its currency fully convertible for at least five years because it worries hedge funds may force the renminbi to plunge. "There's more than Dollars 800bn to Dollars 1,000bn of hedge funds in the world and the Chinese financial system is relatively weak," Mr Li said in an interview with Bloomberg. "If the (renminbi) becomes fully convertible it would be attacked by these hedge funds."
To ease upward pressure on the renminbi, Beijing has in recent years allowed business more freedom to export capital, but officials have not stopped worrying about the risks of being too lax.
One reason can be found in the spectacular boom enjoyed by casinos in south-east Asia, which is partly being sustained by Chinese travellers, who are banned from betting at home, illegally taking money out of the renminbi area.
The authorities have begun to take steps to prevent money laundering, requiring banks to report suspicious transactions. Legislation on money laundering is also being prepared. However, experts say many banks lack the operational structure to monitor funds transferred between regions.
LOAD-DATE: July 25, 2005
posted by Eastlaw at 12:44 AM
0 Comments:
Post a Comment
<< Home