Capital Controls: Peering Through the Regulatory Fog

Exchange rate pressures will perpetuate fears that Beijing will employ capital control interventions at least through the end of 2016. China’s households and corporates want to diversify into foreign assets, and that means balance of payments strains if these flows are one-way. Stringent capital controls are a temptation in pursuit of medium-term currency stability.

But China’s foreign exchange regulators (SAFE) are highly unlikely to reach for such tools willy-nilly, at least formally. Over the past year senior officials have stressed their commitment to forward action on capital account liberalization, and the hit on credibility from reversing that would be severe. SAFE and other institutions have memorialized that in policy guidance. Financial technocrats have recently pointed out that capital controls are of questionable effectiveness anyway. Yet at the same time a number of outbound investment deals have stalled for murky reasons, and anecdotal reports are naturally fueling rumors that an unofficial clampdown on illicit outflows is underway, conducted through tighter enforcement of existing regulations and other informal channels.

In this note we review what Chinese authorities have said about capital controls in recent months, and what they actually done to slow outflows. We assess the balance of payments impact of these measures, and project near-term policy.

Posted August 1, 2017
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