China Tightens Controls on Its Currency

In an attempt to stem “billions of dollars” in hard currency from flowing out of the country, the Chinese government tightened controls on foreign exchange trade Wednesday and ordered companies illegally stashing dollars outside China to bring the money home by today.

“Those who fail to comply will be punished,” said Wu Xiaoling, China’s top foreign exchange official. Wu said an investigation revealed that China had lost nearly $4 billion through false customs declarations and more through other frauds and loopholes.

Analysts say a gap in current account numbers suggests that about $17 billion has leaked out of China at a time when Beijing is desperately trying to bolster confidence in the yuan, its currency.

Although the move may make business a bit less convenient for foreign investors, the new regulations are an attempt to crack down on corruption and maintain China’s economic stability in a volatile time, Wu said.

Unlike Malaysia, which recently implemented harsh new currency controls,

China has long had tight restrictions on the yuan, which is convertible only for foreign trade. Indeed, the yuan’s non-convertibility has insulated it from the speculative attacks that have plagued the rest of the Asia.

At a news conference, Wu reiterated Beijing’s mantra that the government will not devalue the yuan to boost sagging exports, a move that could potentially spark a round of competitive devaluations around the world.

“It would dampen confidence in the currency and the economy,” she said. “A big country cannot rely on a devaluation to revitalize its economy but must increase domestic demand.”

But state-owned and private companies, worried that China, too, could be swept up in the Asian crisis, have found many ways--legal and not--to send money out of the country

Foreign exchange reserves have hardly grown this year, stagnating at about $140 billion, despite a trade surplus of $31.3 billion and foreign investment of $27.4 billion. The missing money is declared as “errors and omissions.” But officials admit that the difference suggests capital flight.

Even inside China, Wu noted, individuals have hoarded about $80 billion in hard currency instead of converting it to yuan, creating a skittish private reserve larger than most nations’ foreign exchange funds.

Nor will China likely have much luck getting money back from “safe havens” such as the United States. Most such outflows are funneled through private individuals or a third party to make them difficult to trace, according to Southern California bankers familiar with Asian investments.

“At the best, what they can do is stop the continuous outflow of foreign exchange” from China, said Li-Pei Wu, chairman and chief executive of General Bank, one of the largest Chinese community banks in Southern California.

Although the new regulations are aimed primarily at Chinese companies that have evaded currency controls, foreign companies are likely to be burdened by extra layers of bureaucracy needed to step up monitoring of foreign exchange transactions.

After today, customs declarations must be delivered in person and will be double-checked to prevent companies from charging for more goods than are shipped and stashing the excess payment overseas, a common gambit.

Other new restrictions mean domestic banks can no longer do foreign exchange business with companies outside of their local area, though foreign banks will still be able to.

Banks cannot lend yuan to foreign borrowers for hedging dollar debt, only for working capital. Individuals receiving cash transfers of more than $10,000 will be allowed to use the funds only for “investment,” a rule aimed at preventing black market trade. And foreign borrowers who want to finance new projects in yuan to reduce their risk if the currency is devalued must put up foreign currency as a guarantee, Wu said.

The new restrictions have heightened demand for dollars. On Shanghai’s street corners Wednesday, black market traders known as “yellow bulls” were offering 9.1 yuan for each dollar, a premium over the official rate of 8.3.

But because of the size of China’s $140-billion reserve, as well as the strict currency controls, the current flow of cash out of the country does not pose a real threat to the exchange rate, analysts say.

“The Chinese authorities know there are lots of loopholes in the foreign exchange restrictions,” said Qu Hongbin, an economist at Dresdner Kleinwort Benson in Hong Kong. “They are just plugging the dikes while they can.”

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Times staff writer Evelyn Iritani in Los Angeles contributed to this report.