Last week, China’s central bank, the People’s Bank of China (PBoC), relaxed capital controls for the first time this year by scrapping two rules intended to bolster the renminbi. Many analysts view this move as a sign that official nervousness about currency depreciation and capital flight have eased.
In a notice sent to banks on September 8, the PBoC dropped a requirement which had raised the cost of using currency forwards (a type of foreign-exchange derivative) to bet on renminbi depreciation, according to a senior foreign-exchange trader at a Shanghai-based Chinese bank.
In a separate move, the PBoC eliminated a requirement that banks hold reserves against renminbi deposits held in Hong Kong and other offshore centres, according to a foreign bank executive who was briefed on the latest offshore deposit rule.
While the rules that were revoked last week apply more to currency traders than to real estate, these changes suggest that further loosening may take place in the near future.
“For the real estate markets, [the changes show] that capital controls could be further unwound in the near future. That would potentially lead to increased Chinese investment in overseas property,” said Jane Lu, head of Australia for Juwai.com, a Chinese-language international property website.
“China's government is declaring victory in its battle over capital flight. Their goal was really to show they had the ability to control the value of their own currency, and they have certainly done that. The yuan has now more than regained everything it lost last year,” she added.
It’s probably wise to look at this new loosening of capital controls as an experiment. If all goes well, then observers can expect China to further unwind capital controls in the coming months.
“Over the past year, China has capably avoided the cataclysms that many Western observers predicted,” Lu said. “They avoided a dramatic economic slowdown. They prevented a crisis of their currency and foreign reserves. And they have avoided a debt crisis.”
“Now, China is showing that it can both tighten and loosen the money spigot. I think you have to give credit where it is due and admit that the Chinese government is much better at economic management than some people have been willing to admit.”
Juwai.com expects this year to be one of the two or three biggest years on record for Chinese international real estate acquisitions.
“Australia is the second most popular country in the world with Chinese buyers, after the United States and before Thailand. The latest Foreign Investment Review Board report found that Chinese buyers had been approved to invest $32 billion in Australian real estate,” Lu said.
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