China Eases Capital Controls As Dollar Weakens

Facilitating Beijing's decision has been the steep drop in the US Dollar in 2017. As a reminder, the yuan slumped around 6.5% against the USD last year, but has since firmed nearly 1% in 2017, defying many analysts' expectations of further depreciation, and benefiting from Trump's recent attempt to talk down the dollar, no matter how hard Mnuchin may try to deny it. Suggesting that Yuan appreciation may just be getting started, a Reuters poll earlier this month indicated investors likely increased their bullish bets on the yuan to the most since July 2015.


Furthermore, with less incentive for capital flight, China's foreign exchange reserves have clawed back above the closely watched $3 trillion level. Xinhua reported that on Tuesday, Premier Li Keqiang said that market confidence in the yuan has significantly improved.


Still, the small relaxation step won't help much in terms of outbound investment approvals, said Greg Burch, who works on mid-market China outbound M&A deals as a Hong Kong-based partner at the Locke Lord law firm. "This particular move won't help on real M&A deals...It's like the brakes aren't totally locked up any more, but the foot is still on the brake pedal pretty hard," said Burch.









On Tuesday, China reported that its non-financial outbound direct investment (ODI) slumped 30.1 percent in March from a year earlier as authorities kept a tight grip on outflows. In the first quarter, it fell nearly 49 percent. While Beijing says it supports legitimate overseas investment, regulators have warned they would pay close attention to "irrational" investment in property, entertainment, sports and other sectors.



China did not spell out what criteria would still be applied to outflows. "Actually, it'll be the same as SAFE's previous policy stance, emphasizing that cross-border settlements for legal and compliant business are guaranteed," said one of the sources, who declined to be identified.


Ultimately, the fate of China's capital control regime may depend on the outlook for the U.S. currency, which while until recently was expected to rebound as the Federal Reserve continues to slowly raise interest rates, such expectations were put in question yesterday when Goldman ended its long-held bullish dollar call.


But perhaps the best indicator of whether Chinese capital outflows will moderate can be observed in bitcoin, which has been the biggest beneficiary of China's escalating capital controls over the past two years. As of this morning, BTC was trading at $1,200 just shy of all time highs. As such, at least the electronic currency does not expect major changes in the trajectory or size of Chinese capital flows.







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