SHANGHAI -- China has lifted a cap on overseas yuan transfers for banks in Beijing and Shanghai as capital outflows and the currency's depreciation have moderated, but what comes next remains anyone's guess.
The People's Bank of China notified banks in the two cities of the change in mid-April, apparently through group meetings or one-on-one talks. Banks across the country were ordered at the end of 2016 to cap remittances based on how much yuan was coming in from abroad, guarding against net capital outflows.
Several explanations for the shift have been proposed. The first is that China has brought depreciation in the yuan and capital outflows under control of late. The currency approached 7 to the dollar at the end of 2016 and early this year, but has since stabilized around 6.88. Foreign currency reserves, which at one point slipped below $3 trillion, grew in both February and March.
The second is a concern that keeping remittance restrictions in place could prevent companies from sending funds as necessary. "More than a few dozen" companies fell behind on overseas payments after the cap was put in place, according to a banking source. Lifting the restrictions aims to prevent failed payments or other confusion, particularly as foreign-affiliated companies prepare to pay dividends. Some say regulators may also have worried that overregulation could curb companies' forays into China.
A third explanation is that Beijing is responding to demands from Washington for looser capital controls. U.S. President Donald Trump blasted China while on the campaign trail for allegedly manipulating its currency. The two sides may have since reached an agreement for the remittance restrictions to be loosened, according to an investment banking source. The U.S. Treasury Department released its semiannual report on currency policy, which declined to label China a currency manipulator, last Friday -- timing that is suggestive of some coordination.
Despite the initial step, few expect China to free up its capital markets further, through deregulation or otherwise. The remittance restrictions remain in full force outside Beijing and Shanghai. Loosening them only in major cities, home to many foreign businesses, is seen by some as an attempt to suggest progress on liberalization without taking additional steps.
Banks are still ordered to keep the amount of foreign currency they sell to customers at or below the amount coming in, and authorities remain on guard against capital flight and further yuan depreciation. Market players have even speculated that the letup on remittances could be a temporary measure.
China's foreign currency reserves are still around $1 trillion below their peak near $4 trillion in June 2014. Further declines could hurt China's creditworthiness. Keeping markets and the economy steady is of particular concern as the Communist Party prepares to choose new leadership at its twice-a-decade National Congress this fall.