Some Shanghai banks said to curb individual forex purchases

[SHANGHAI] Some Shanghai banks have asked their branches to strictly control the sale of foreign exchange to individuals, according to people familiar with the matter, as regulators vowed to step up monitoring of illegal currency transactions.

The banks asked several branches to closely check whether individuals sent money abroad by breaking up foreign exchange purchases into smaller transactions, and to take punitive actions if violations are discovered, said the people, who asked not to be identified because the move hasn't been announced.

Two of the people said their bank was ordered by the State Administration of Foreign Exchange to report its latest data on foreign-exchange transactions.

The tightening moves in Shanghai, China's financial hub, come amid risks that households' currency stashes may join the outflows of capital that threaten to destabilize the nation's economy as businesses and individuals bet against the yuan.

More than US$840 billion exited the country in the first 11 months of last year in an unprecedented exodus, according to a Bloomberg gauge.

"With expectations for yuan to fall further, there's still pressure for outflows," said Liu Dongliang, a Shanghai-based analyst at China Merchants Bank Co. "Capital controls have tightened. The door was widening before, and now it's leaving little room."

In a fresh sign of heightened scrutiny, the 21st Century Business Herald reported Thursday that regulators will now review any outbound direct investments of more than US$50 million by companies in Shanghai's free-trade zone before allowing the foreign currency for the transaction to be bought.

Previously, currency purchases for investments less than US$300 million weren't reviewed, the newspaper said. The regulator didn't immediately respond to a faxed inquiry about the report.

In a Jan 20 statement outlining its focus for the year, SAFE's Shanghai branch said it would use its systems to conduct off-site inspections as it pledged to "severely crack down on illegal foreign transactions such as underground banking" to curb cross-border capital flows.

Analysts at JPMorgan Chase & Co said this month that outflows have the potential to become "practically boundless" as they broaden, citing examples such as greater foreign direct investment by China and overseas investors exiting the nation's equities and bonds.

"As the economy slows and the yuan drops, whether it's individual or corporates, they will surely have ways to take out their money," China Merchants Bank's Liu said. Measures such as the banks' clampdown on foreign-exchange purchases "will have an effect, but it's impossible to completely block outflows."

BLOOMBERG