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November 26, 2009

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China tweaks rules on forex to halt hot money

CHINA yesterday tightened rules on individuals converting and transferring yuan and foreign exchange in and out of the country to curb speculative cash on expectations of the currency's appreciation.

Overseas individuals or institutions are now each limited to sending foreign currencies to no more than five Chinese individuals to convert into yuan the same day, effective immediately, the State Administration of Foreign Exchange said on its Website.

Money transferals are not allowed on an individual's or institution's yuan account if the transactions are from five or more individuals in China converting forex into yuan on the same day.

"The new rules are aimed to curb irregular forex flow through individual channels and fight the forex black market," China's top forex regulator said in a statement.

China allows individuals to convert up to US$50,000 or equivalent forex into yuan annually.

However, some individuals have sought to bypass the annual quota through breaking down huge amounts into several accounts.

The old method worked thus: Party A targets buying US$100,000 worth of yuan, which doubles the annual quota. He or she settles the money with five accounts in China, each for US$20,000, on the same day.

In the new rules, such "breakdown" amounts to bypass quotas are banned.

The rules are set to prevent speculative investment. They also limit cash conversions in China, set at a daily limit of the equivalent of US$5,000.

A daily conversion of more than US$5,000 into yuan can be only applied with Customs documents or the individual's forex savings withdrawal documents.

Speculative capital flow, or so-called "hot money," has gained notoriety since September.

The People's Bank of China said earlier this month that forex policy would take into account global capital flow and changes in major currencies, fueling speculation that it may allow the local currency to strengthen against the weak United States dollar.

The yuan has been flat against the greenback at about 6.83 since mid-2008.

Economists called this a "repeg to the dollar" in comparison to China's depeg of the yuan from the greenback in July 2005.

Hedrick Wong, Asia-Pacific economic adviser of MasterCard Worldwide, said the appreciation of the yuan was unavoidable and only a matter of time.

He doesn't expect the yuan to resume appreciation while China's exports are weak.

The view was echoed by several economists, including Citigroup's Shen Minggao.


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