SHANGHAI—Multinational companies are suddenly finding themselves
in the crosshairs as China dials back its effort to turn the yuan
into a global currency, alarmed that it has accelerated the flight
of capital from its shores.
In recent days, according to bankers and officials familiar with
the situation, China's foreign-exchange regulator has instructed
banks to sharply limit how much companies move out of the country
and into their other operations around the world. Until this week,
it was possible for big companies to "sweep" $50 million worth of
yuan or dollars in or out of China with minimal documentation. Now,
these people say, the cap is the equivalent of $5 million, a
pittance for the largest corporations.
Beijing is fighting an increasingly vicious cycle of capital
outflows that weaken the yuan. Most dramatically, the State
Council, China's cabinet, intends to tighten scrutiny of overseas
acquisitions by domestic companies, The Wall Street Journal
reported last week, which could result in deal delays or outright
cancellations. Until now, few of China's capital-control measures
took obvious aim at foreign businesses.
The recent moves effectively erode the yuan's appeal as a rival
to the dollar just two months after the International Monetary Fund
added it among its reserve currencies on Oct. 1—an acknowledgment
the IMF trusted China to further loosen its grip on the yuan.
Later that month, top financial officers from one of the largest
U.S. pharmaceutical makers paid a visit to the Chinese agency that
decides how much of its hundreds of millions of dollars deposited
in the country can be taken out.
The State Administration of Foreign Exchange had a message for
the drugmaker, according to a participant: prepare for "increased
friction."
The blunt talk marked a contrast with a year-earlier visit to
the same regulators. "Things changed 180 degrees," said the
participant.
The clampdown on "sweeping" follows a meeting on cross-border
capital flows last week at China's central bank, where officials
expressed alarm that a rising amount of money is exiting as yuan,
rather than dollars, according to notes of the gathering reviewed
by the Journal.
Before "sweeping" was permitted in an experimental free-trade
zone in Shanghai in mid-2013, companies wanting to move cash
generated by their China operations faced cumbersome documentation
and extra taxes.
The IMF cited "sweeping" among the reasons it considered the
yuan credible as a global reserve asset. The pullback now suggests
Chinese authorities are alarmed that so many companies are using it
to move yuan directly offshore, such as to Hong Kong, where it can
be freely exchanged.
According to notes of its recent meeting, after the central bank
determined that the entire net outflow from China during October
was in yuan, whereas during the year's first half amounts were
split between yuan and foreign currencies, it decided to instruct
commercial banks to all but halt so-called offshoring for the
purposes of converting yuan into other currencies.
The meeting notes quote central-bank officials describing the
new limits as temporary and their support for the yuan's
internationalization as "unwavering."
The People's Bank of China didn't respond to requests for
comment. Yi Gang, the central bank's deputy governor, told Xinhua
News Agency in an interview published Sunday that China's inflows
and outflows are normal and that money will return as China's
economy rebounds. Under the rules for "sweeping," companies must
eventually bring back to China the funds they have taken out as
part of their corporate cash pooling strategies, though the time
frame is flexible.
Bankers say after last month's U.S. election, some American
businesses began "sweeping" more money out on a bet they might need
to move funds quickly if the administration of President-elect
Donald Trump declares a tax amnesty on U.S. corporate deposits
abroad.
"It's possible, too, that anticipation of tighter capital
controls in the future has nudged the treasury operations of
multinational companies to move more money out of China," said Ker
Gibbs, an investment banker who is chairman of the American Chamber
of Commerce in Shanghai.
China's largest domestic companies are also feeling the impact
of limits on "sweeping."
"Up until two months ago, we were able to wire millions of
renminbi to an offshore affiliate via this program with no
problem," said an official at a big state-owned electricity
company, using another name for the yuan. "But now, our bank has
informed us that all such transfers will be reviewed by the
foreign-exchange regulator," the official said.
Chinese authorities blame erosion in the yuan's value primarily
on the dollar's strengthening, which accelerated after Mr. Trump's
election. After recently touching lows not seen since mid-2008, the
yuan is down 6.2% against the dollar so far this year.
The free-trade zone in Shanghai was designed to test financial
reforms, though few of the big plans officially announced, such as
trading in crude-oil futures, actually launched.
But "sweeping" sparked excitement.
"Trapped cash is no longer a valid concept," said Lewis Sun,
HSBC's head of cash management, in a promotional video from the
bank that explained the program. Other bankers also gushed about
the liberalization, as did executives of multinational companies
including manufacturers TRW Inc. of Michigan, Dover Corp. of
Illinois and Minneapolis-based Pentair Inc.
Asked about the recent moves, the companies declined to comment
or didn't respond.
Now, the need to stabilize capital flows and prevent the yuan
from a rapid downward spiral trump ambitions for the yuan's global
use.
Last week, the Chinese premier, Li Keqiang, paid his third visit
to Shanghai's free-trade zone.
Hours after his inspection, the local branch of the country's
central bank held a rare press conference to announce a new
risk-control system to monitor currency flows through the zone to
ensure they are balanced by supporting inflows—a backhanded
indication cash had been leaking out.
Junya Qian contributed to this article.
Write to James T. Areddy at james.areddy@wsj.com and Lingling
Wei at lingling.wei@wsj.com
(END) Dow Jones Newswires
December 01, 2016 10:25 ET (15:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Pentair (NYSE:PNR)
Historical Stock Chart
From Mar 2024 to Apr 2024
Pentair (NYSE:PNR)
Historical Stock Chart
From Apr 2023 to Apr 2024