Chinese Banks Being Forced To Shield Foreign Exchange Regulator

Local media reports state that China’s foreign exchange regulator is asking banks in the country to not reveal to customers the series of curbs that it has placed on capital outflows. Additionally, the regulator is asking analysts to not issue reports with negative views on the yuan. Regulators are hoping to ward off a further downward slide in the value of yuan with these measures.

The yuan fell by over 6 percent against the dollar in 2016, reaching its lowest in eight years. The yuan’s deterioration has caused China’s State Administration of Foreign Exchange (SAFE) to issue several measures that restrict the flow of capital out of the country. Rules include limits on banks’ currency volumes in some regions and increasing number of approvals.

According to the bankers, SAFE officials told them to manage foreign exchange deficits without revealing that SAFE was controlling outflows, in a meeting held late last year Bankers have said that SAFE issued oral instructions asking them to keep the new rules a secret. The bankers now have to turn away customers without any explanation when their bank reaches the limit set by SAFE for foreign exchange transactions, which is damaging their relationships with their clients.

In a statement, a banker from Ping An, a commercial bank in China said,

We’re not going to tell our customers that our forex business has stopped; we just have to find ways to turn down the business we’re not allowed to do. It’s not good for client relationships

The banker said that he was asking his clients to go to other banks. The banks have also been asked to ensure that none of the transactions are fake.

China’s foreign exchange reserves have been declining at a rapid rate recently. In November it dropped to $3.05 trillion from the $3.3 trillion seen for first 11 months of 2016. Most traders are expecting continued outflows as increases in U.S. interest rates is likely to result in capital moving towards dollar assets.

SAFE is however asking banks to make clients buy yuans and sell dollars, which might result in the banks’ clients incurring losses. According to sources, the regulator is also trying to shut down programs which seek to open up foreign markets to investors in China. An investment program that sought to set up global funds for enabling Chinese investors to invest overseas was withdrawn without explanation recently.

The Shanghai branch of SAFE made an announcement earlier this week stating that the news about giving out secret instructions was inaccurate and was misleading the public.