China tightens capital controls after devaluation

China is tightening capital controls following a devaluation of its yuan currency, media reports said, as worries about financial outflows rise.

The State Administration of Foreign Exchange (SAFE) had ordered financial institutions to increase checks and boost controls on foreign exchange transactions, especially over-invoicing of exports which is used to hide capital outflows, the Financial Times on Wednesday quoted unnamed sources and an internal memo as saying.

In a similar report Bloomberg News quoted Tommy Ong of DBS Bank Hong Kong as saying: “The main objective is to reduce volatility, curb capital outflows and limit depreciation pressure on the yuan."

Last month, China moved the yuan almost five percent lower in a week, saying it was part of broader economic reforms aimed at shifting towards a more flexible exchange rate.

The suddenness and scale of the devaluation in the normally stable unit sparked worries the world's second-largest economy was performing worse than revealed.

China's foreign exchange reserves fell by a record $93.9 billion last month to reach $3.56 trillion at the end of August, as Beijing sold dollars to support the yuan following jitters over the surprise devaluation.
The central bank, the People's Bank of China (PBOC), on Tuesday said it will require banks to pay a 20 percent deposit on forward sales of foreign exchange, in a move aimed at speculators. A forward sale is a commitment to sell at a predetermined price and date.

But in a statement the PBOC denied the move amounted to a capital control as it did not restrict transaction volumes and did not require approval for individual transactions.

Chinese Premier Li Keqiang on Thursday said China will keep the currency stable and vowed to push forward making the yuan freely convertible. He also promised to allow foreign central banks to directly trade in the country's currency market.

"We will continue to keep the (yuan) exchange rate basically stable at a reasonable and equilibrium level," he said in a speech at the World Economic Forum in the Chinese city of Dalian.

Addressing business executives attending the forum on Wednesday, Li denied China had sought a competitive devaluation to boost exports as economic growth slows.

"China will not want to see any currency wars," he said.

The yuan closed 0.16 percent lower against the dollar at 6.3778 on Wednesday. On Thursday, the central bank set its daily rate for the yuan 0.22 percent lower from the previous day's fix at 6.3772 to the dollar.