This is the first part from a 3-serie part paper that I wrote on the 9th of June 2017. Please be advised that new events might have taken place that can make certain information in this post outdated.
In recent years, China has grown tremendously due to demand from abroad. Due to this economic growth, China has been able to develop at a fast paced rate. Now, China wants to make use of this development by not allowing the economy to depend on external demand from abroad, but move towards a consumer based economy. This first part looks at the new currency regulations and the causes that led to this.
The current regulations
For many years, there has been a limit to the amount of money ($ 50.000) that both businesses and individuals were allowed to move outside of China (especially the U.S.). Chinese companies, however, had the opportunity to send more money abroad by way of investment. An investment must first be approved by various government agencies such as the Ministry of Commerce. Approval however, may take a very long time. As the government ultimately determines whether or not a company is allowed to make such an investment abroad, it might get simply get refused without a clear explanation.
Despite the huge economical growth in China, do not only Chinese companies decide to invest abroad, rich Chinese individuals do too. This is often done through buying real estate in a country where there is relatively more stability, and also where you can actually own the land. (Shen, 2015) In China, all the land belongs to the government, so you have to lease the land from the government. For residential residences, the land is leased out for a period of 70 years, and for companies this is usually a period of 50 years. The land of a residence is automatically renewed after 70 years, according to Chinese legislation. (Library of Congress, 2015) There are a lot of restrictions and legislation when it comes to real estate, this is why a lot of Chinese are more likely to look abroad for a real estate investment.
In addition to real estate, Chinese tend to invests on the stock market. The stock market is seen not only as an investment or a tool to building a stock portfolio. One sees it as a hobby, a way to gamble. (Egan, 2015) Gambling is illegal in China, and plenty of people see investment as a gambling opportunity. In addition, it is also a way to earn money compared to saving or investing in real estate. However, there are many risks associated with investing, especially when it involves people that are investing their pension and savings without any knowledge of investing. When in 2015 and in 2016, the Chinese stock market took a huge blow, people quickly realized that it was perhaps not the smartest idea to invest a large part of their capital on the Chinese stock market. (Matthews, 2016) The market crash of 2015 and 2016 were partly due to the Chinese government that wanted to keep the Chinese currency weak, so that it remained attractive for the rest of the world to buy from China.
Ultimately, it is in China’s advantage to keep spending within China, thus keeping money in China, and this way China can maintain economic growth in a way that is less dependent on foreign demand. Over $ 1.2 trillion has left China since August 2015, when China devalued its currency. People were shocked and companies decided to transfer more money outside of Mainland China, often Hong Kong, as soon as possible. In spite of the fact that there were already measures to counter the outflow of the Renminbi/Yuan (Chinese currency), the government decided to implement more measures to protect it.
The new regulations
The Chinese authorities have decided to protect the currency even better on top of the existing regulations. This at the expense of many companies and richer individuals. The first step that China made was to stop ‘cross-border yuan payments’, which in principle meant that the banks temporarily stopped making payments abroad. Since the Renminbi/Yuan decreased in value, people decided to move their money abroad as quickly as possible. (see illustration) (Bloomberg News, 2017):
The second measure is that there will be requirements for Chinese to convert the Renminbi/Yuan into another currency. The existing regulations, such as maximum exchange of $50.000 will stay, but more and new requirements are being set for this $50.000 maximum before someone is actually allowed to make a transaction abroad. Some of these new requirements are as follows (Bloomberg News, 2017):
- One has to promise that money abroad will not be used for the purchase of real estate, securities, life insurance or any other type of investment insurance.
- A detailed description of what is planned with the money such as a study abroad, family visit, medical reasons and a time schedule should be given.
- Offenders will be placed on a blacklist and will not be able to make transactions abroad for 3 years.
- One must be able to confirm that they do not lend money or try to exceed the maximum of $ 50,000 in cooperation with the help of other citizens.
The third way the Chinese government is trying to keep the Renminbi/Yuan strong is to sell their foreign currency owned by state-owned enterprises. This is a measure that will keep the Renminbi/Yuan strong against, for example the US Dollar. In the long term this will not effect the market directly as these state-owned enterprises only hold a limited amount of foreign currency .
In addition to the above-mentioned measures, there are still more restrictions on making a foreign investment. Purchasing insurance outside of Mainland China in for example Hong Kong, is limited to a maximum value of $5.000. It is clear that China is doing its utmost to protect the Renminbi/Yuan, and to be honest, that is understandable. The Chinese economy is still too dependent its exports even though it is slowly trying to move towards a consuming based economy.
This was the first part of a 3-serie part paper about the currency regulations in China, in the next part will be about how Chinese bypass the currency registrations that are occurring during the governments ongoing battle to protect its currency and economy.