China introduces fines and blacklists to tighten control on individual purchases of foreign exchange

Written by Grace Tang || January 11 2017

On December 31st the State Administration of Foreign Exchange (SAFE) of China announced more stringent rules on individual purchases of foreign currencies, alarming the Chinese citizens with increased restrictions on forex-related investments at the start of the New Year.

The new forex policy will come into effect on 1st July 2017.

Individuals must complete an application form imposed by SAFE specifying their purpose of currency purchase and time of usage, in addition to the existing forex purchase forms from the banks. Specifically, the new application form refined the purpose list into nearly ten detailed categories. It also reasserted the banning of foreign currency purchases of properties, securities, life insurances and investment insurances.

However, the limit for personal forex purchases per year remains USD 50,000. The design of this policy was for the Chinese government to put closer scrutiny on and target more specific investigations around suspicious forex transactions. Violation of the rules or inconsistency for the purpose specified on the form against the actual use of forex will result in a record on the ‘investigation list’ and credit blacklist, heavy fines, as well as being temporarily banned from future foreign currency purchases.

Some believe that China’s declining foreign reserves are one of the possible reasons that triggered the tightening control on personal forex purchases. As official data reported, the amount of foreign reserves has shrunk for six consecutive months to date and been approaching the critical level of USD 3 trillion. The new policy may indeed be a strategy of capital control to reduce the outflows of foreign reserves.

Nevertheless, officials have claimed that it is, in fact, to mainly stop disguised outbound investment transactions by bringing forex control to a higher level. Amid the uncertainties around China’s economic prospects, Chinese investors have been continuously seeking to move their assets offshore, in some cases doing so in fraudulent ways. For example, buying insurance for investment purposes in Hong Kong, or using multiple investor quotas to transfer a large sum of money abroad.

We anticipate that the new policy will hinder the Hong Kong insurance sector as the Mainlanders face greater restrictions on and longer verification process for Hong Kong currency purchases to buy insurance. Moreover, the more intense crackdown on forex purchases relating to outbound investments would mean cooling real estate markets abroad, such as Australia and the U.S., as overseas property investments will potentially drop in the upcoming few months. On the other hand, however, other ‘grey’ channels for transferring money abroad will possibly take up the chance and become more popular, such as fake invoices used by companies.

Overall, any potentially significant impacts on the control of outbound foreign direct investments will be seen after the new policy comes into force in the second half of the year.