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China forex regulator aims to loosen controls in FX market

BEIJING (Reuters) - China will create an open, competitive domestic currency market and should let a flexible exchange rate mechanism regulate the impact of capital flows and balance international payments, a deputy head of its foreign exchange regulator has said.

Writing in a State Administration of Foreign Exchange (SAFE) publication on Thursday, Fang Shangpu said a so-called "negative list" would be established, based on prudential assessment. Analysts believe such a list would specify sectors of the foreign exchange market that would remain subject to controls.

According to Fang, foreign exchange conversion limits would be gradually phased out for "microscopic areas", a term interpreted by analysts as meaning transactions by individuals and companies.

China's foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years, though tighter regulatory controls appeared to making some progress in slowing capital outflows.

China has long committed that it would push forward with market-oriented exchange rate reform that allows for two-way flexibility in the Chinese currency, though the yuan remains tightly controlled.

And some analysts fear a heavy and sustained drain on reserves could prompt Beijing to devalue the yuan as it did in 2015.

Fang said SAFE will "strengthen checks on authenticity and compliance of banks' foreign exchange businesses".

He reiterated SAFE's call for tighter controls of capital outflows, which have contributed to a weakening yuan and the drawdown of forex reserves.

The authority will also continue to "combat illegal activities and wrongdoings in order to keep order in the forex market", and it will "strictly deter arbitrage that circumvents policies," Fang said.

SAFE said this week that it would let foreign investors trade forex derivatives in its interbank bond market for the first time.

"(China should) increase the depth of the foreign exchange market, increase the number of trading tools and market participants, and establish a multi-tiered and inclusive trading platform," Fang said.

He also said China would work on including cross-border capital flow management in its macro prudential risk assessment framework for banks and would improve policy tools for counter-cyclical management of cross-border flows.

Analysts and market participants said they did not expect any relaxation of the domestic foreign exchange market soon, and were unclear over the extent of the plans for liberalization.

(Reporting by Elias Glenn and Winni Zhou; Editing by Simon Cameron-Moore)

 

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