China Restricts Foreign Exchange Capital Outflows

China’s increasingly strict foreign exchange controls is hurting not only Chinese individuals and companies, but also impacts international firms repatriating profits from China. This will make foreign firms think twice about Chinese investments.

Foreign Exchange Controls
Chinese nationals have a limits of $50k US/yr for foreign exchange. This has been the case for many years, though I cannot determine when it started. Before you could send more money overseas by declaring it, but as of 2017 January these rules have been tightened up and now exclude purchases of real estate or overseas securities.

Along with these capital restrictions is a layer of bureaucracy renown for its slowness. 2

In addition, Chinese overseas can withdraw up to 100,000 yuan each year, otherwise the domestic card will be suspended for this and next year. That is harsh.

个人持境内银行卡在境外提取现金,本人名下银行卡(含附属卡)合计每个自然年度不得超过等值10万元人民币。超过年度额度的,本年及次年将被暂停持境内银行卡在境外提取现金 Individuals holding domestic bank cards to withdraw cash from abroad, the bank card (including subsidiary cards) in my name must not exceed 100,000 yuan in each natural year. If the annual quota exceeds the annual quota, the domestic bank card will be suspended for cash withdrawal outside the country this year and the following year. source

Implications
Of course for Chinese people, this makes migrating to a new country more difficult if they have assets in China. $50,000/yr is not much to start a new life.

The major implications are for international businesses are significant. Capital and profits are stuck in China and can be difficult to return home. With the sharp drop in the yuan, delays can result in significantly reduced profits or even losses for anyone waiting to convert money out of the RMB.

The Mundellian impossible trinity, or Mundell-Fleming trilemma, says you cannot have all three at the same time: independence of monetary policy, fixed foreign exchange rate and the free flow of capital. This is true in China’s case, in that they have an independent monetary policy and a fixed exchange rate, but not the free flow of capital.

If capital was free to flow, it would flow out of China and thus put downward pressure on the yuan. As the yuan is pegged to the USD the CCP greatly restricts capital.

As the US will raise interest rates 4 times next year, there is pressure on all countries to raise their prime rates. With capital restrictions on the yuan, business cannot repatriate their profits, the yuan depreciation and the USD prime rate increases, this will put pressure on companies to invest in places other than China.

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