China Works to Slow Capital Flight

Daily Analysis - 03/01/2017

PBOC Implements New Reporting Requirements to Stem Capital Outflows

Quoting a central bank economist, the state news agency Xinhua stated that China's new rules on overseas transfers of yuan currency and cash transactions are not forms of capital controls. With the Yuan slipping to more than eight year lows, Beijing has announced a string of rules in the last few months to stem outflows which have seen nearly $1.10 trillion erased from foreign currency reserves.

Some Chinese Businesses Could Be Affected

In another attempt to stem the tide of cash escaping from its borders, the People’s Bank of China changed bank reporting requirements on Friday to cover all domestic and overseas transactions larger than 50,000 Yuan ($7,201). According to PBOC Chief Economist Ma Jun the obligation of reporting transactions larger than CNY 50,000 will be assumed by financial institutions.

He stated that here will be no official approval procedures and no extra documentation required for individuals or companies. Ma Jun pointed to other major economies that have similar rules. However, China is preserving the same quota of 50,000 yuan for each individual's annual foreign exchange purchase.

The latest move was aimed to better monitor financing for terrorism and money laundering and not aimed at normal business activities. Nevertheless, new rules are likely to impact smaller Chinese businesses and individuals considering yuan-sellers at the highest volume are average Chinese citizens.

Brexit Offers Opportunities for EU Countries

According to Europlace, the French capital’s lobby group, Paris banks are seeking to entice as many as 20,000 workers from Britain’s finance industry ahead of the potential triggering of Article 50. As it competes for talent with cities such as Frankfurt, Paris will make its case to London-based executives in a series of meetings scheduled for February.

A European race to benefit from the Brexit is brewing as British Prime Minister Theresa May plans to start negotiations by the end of March. Global bank chiefs have warned May that unless she can protect their easy access to its market, they will start shifting operations and jobs from the UK to other states in the EU. HSBC previously said that it planned to move as many as 1,000 employees to Paris from London, while Citigroup is considering relocating some of its London-based equity and interest-rate derivatives traders to Frankfurt.

Oil Production Cuts Positively Influence Prices

After the largest annual gain since 2009, oil advanced as output cuts by Kuwait signaled OPEC and other producing nations are beginning to taper oil production in an attempt to stabilize the market.

OPEC member Kuwait has slashed output by 130,000 barrels a day to roughly 2.75 million a day, according to Kuwait Oil Co. Chief Executive Officer, Jamal Jaafer. Meanwhile, the US added active rigs for a ninth week in a row, boosting the number of rigs to the highest in almost a year.

Oil rose for the first time in three years in 2016 as the OPEC and eleven nations from outside the group decided to reduce swollen global inventories with an output cut plan that was effective on Jan. 1^st. Crude stockpiles remain at the highest seasonal level in more than three decades in the US – the world’s biggest oil consumer.

US Dollar Trims Gains

After falling on Friday, the US dollar reversed course on Monday versus most major peers, and continues to extend gains in early Tuesday trade. Traders will be keeping an eye on manufacturing and employment for additional evidence that the world’s biggest economy is robust enough to endure higher borrowing costs.

Hugh Killen, from Australia’s second-biggest lender, Westpac Banking Corp. stated, “I still think we have a firm dollar-strength trend in place, however I am wary of a New Year rally for riskier assets, especially the Aussie.” While the dollar has climbed against 8 of 16 major developed and emerging market currency peers since December 30^th, the tremendous really over the last month and a half could experience a deeper technical correction over the coming days.

Meanwhile, the Australian dollar is trending modestly higher versus its US counterpart, climbing back from two-straight losing sessions.