China to step up crackdown on illegal forex deals in 2017

BEIJING (Reuters) - China will step up its crackdown on illegal foreign exchange deals this year as authorities boost authenticity and compliance checks on trade and investment, its forex regulator said on Wednesday.

Beijing has announced a series of measures since November to tighten capital outflow curbs, including closer scrutiny of outbound investments and individual foreign exchange purchases, to support the yuan and preserve its foreign exchange reserves.

The State Administration of Foreign Exchange (SAFE) said in its annual report that it will “strengthen authenticity and compliance checks on trade and investment, intensify checks and punishment of illegal foreign exchange activities”.

Authorities will also improve macro-prudential management on cross-border flows to ward off potential risks and “optimize” diversification of foreign exchange reserves to serve China’s strategic goals, SAFE said.

China was likely to maintain a current account surplus and a deficit in capital and financial accounts in 2017, and cross-border capital flows would become more balanced, it said.

“On the one hand, the international environment is unstable, there are many uncertain factors that could cause market sentiment changes and cause fluctuations in China’s cross-border capital flows,” the regulator said.

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“On the other hand, some factors are conducive to balanced cross-border capital outflows and inflows,” it said, pointing to favorable factors including China’s economic stabilization and government policies to boost foreign investment inflows.

Moves to control capital outflows and concerns over a potential further depreciation of the yuan were likely to impede the internationalization of the yuan, Fitch credit rating agency said.

China’s overseas investment yields would likely increase this year, SAFE said.

From 2005 to 2016, China’s foreign financial assets had an average annual investment return of 3.3 percent, lower than average annual rate of return of 6.4 percent enjoyed by foreign investment in China, it added.

The current account surplus, which was equivalent to 1.8 percent of gross domestic product (GDP) in 2016, was likely to be kept within a “reasonable range” this year, the SAFE said. The ratio was down from as high as 10 percent in 2007.

China would also push forward with its market-based yuan exchange rate reform and increase the yuan’s flexibility in 2017, the regulator said.

The yuan CNY=CFXS has stabilized this year, due to curbs on capital outflows and a reversal of the dollar rally, following a fall of 6.5 percent in 2016. Still, it is widely expected to weaken further versus the dollar this year.

Reporting by Beijing Monitoring Desk and Kevin Yao; Editing by Jacqueline Wong and Nick Macfie