April 19, 2017 / 7:01 AM / 3 months ago

China relaxes some cross-border capital curbs as yuan steadies: sources

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FILE PHOTO: A woman walks out of the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing November 20, 2013.Jason Lee/File Photo

SHANGHAI (Reuters) - China's central bank has relaxed some of the curbs on cross-border capital outflows it put in place just months ago to shore up the yuan currency, banking sources said on Wednesday.

The first easing of the measures comes as China's leaders and financial markets feel more confident that pressure on the yuan and the country's foreign exchange reserves has diminished, thanks largely to a pullback in the surging U.S. dollar.

The yuan slumped around 6.5 percent against the dollar last year, but has firmed nearly 1 percent in 2017, defying -- for now -- many analysts' expectations of further depreciation.

Indeed, a Reuters poll earlier this month indicated investors likely increased their bullish bets on the yuan to the most since July 2015.[ASIA/FXP]

With less incentive for capital flight and the economy on steadier footing, China's foreign exchange reserves have clawed back above the closely watched $3 trillion level.

Premier Li Keqiang said on Tuesday that market confidence in the yuan has significantly improved, Xinhua news agency reported.

As of last week, the People's Bank of China (PBOC) is no longer demanding that banks match outflows with equal inflows, the sources said.

The South China Morning Post first reported the relaxation of the capital controls earlier on Wednesday.

There was no immediate comment from the People's Bank of China when contacted by Reuters. The State Administration of Foreign Exchange (SAFE) did not have an immediate response to Reuters' questions on the SCMP report.

Expectations of further yuan depreciation have eased in recent months, opening a window for authorities to relax recent measures, but Beijing is not likely to let go totally, said Raymond Yeung, chief Greater China economist at ANZ in Hong Kong.

In addition to checking exchange rate expectations, the authorities were also using capital controls to control where Chinese money flows, limiting investments in foreign sectors deemed undesirable, he noted.

"The current macro environment obviously favors an easing of the (rules on) fund flows, but that doesn't mean that it is going to have solved the structural issue of the mismatch between the corporate desire to go out versus the central government's centrally-driven approach when they talk about offshore investment," Yeung said.

While the world's second-largest economy still has the largest stash of forex reserves by far, it had burned through over half a trillion dollars since August 2015 trying to support the yuan CNY=CFXS.

The government reacted by intensifying capital controls late last year, making it harder for individuals and companies to move money out of China.

Those measures are credited with quashing speculative outflows and helping to stabilize the currency, but have also hampered legitimate outflows as China Inc goes more global.

Chinese businesses have complained that the curbs were damaging their plans for overseas investments and acquisitions, while foreign firms have been more reluctant to invest in China for fear of having trouble repatriating profits.

In March the U.S. owner of Dick Clark Productions Inc said that one of its affiliates terminated an agreement to sell assets to Chinese conglomerate Dalian Wanda Group, with Reuters reporting earlier the deal was under pressure amid tight scrutiny by Beijing on outbound deals.

But the small relaxation step won't help much in terms of outbound investment approvals, said Greg Burch, who works on mid-market China outbound M&A deals as a Hong Kong-based partner at the Locke Lord law firm.

"This particular move won't help on real M&A deals...It's like the brakes aren't totally locked up any more, but the foot is still on the brake pedal pretty hard," said Burch.

On Tuesday, China reported that its non-financial outbound direct investment (ODI) slumped 30.1 percent in March from a year earlier as authorities kept a tight grip on outflows. In the first quarter, it fell nearly 49 percent.

While Beijing says it supports legitimate overseas investment, regulators have warned they would pay close attention to "irrational" investment in property, entertainment, sports and other sectors.

The sources did not spell out what criteria would still be applied to outflows.

"Actually, it'll be the same as SAFE's previous policy stance, emphasizing that cross-border settlements for legal and compliant business are guaranteed," said one of the sources, who declined to be identified.

Much will depend on the outlook for the U.S. currency, which analysts expect to rebound eventually as the Federal Reserve continues to slowly raise interest rates.

Reporting by Shanghai Newsroom and John Ruwitch; Additional reporting by Elias Glenn in Beijing; Editing by Kim Coghill

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