How are China's capital controls affecting cross-border transactions?

While managing a capital outflow crisis as foreign investors cash out of the market and companies repay dollar loans amid a depreciating currency, China's policymakers have implemented a wide array of tools since 2014 to plug the leakage, by tightening capital controls and exhausting foreign exchange (FX) reserves to defend the renminbi. An estimated $1.2 trillion has flooded out of the country since China's shock currency devaluation in August 2015, most notably in the form of outbound M&A, fake trade invoices, and overseas insurance and property purchases.

After more than two years of market interventions and capital curbing measures, in late 2016, the PRC government substantially ramped up efforts to stem outflows. Not every single policy has been incorporated into official regulations—some are shown in public statements or take the form of “window guidance”—but the moves carry sweeping practical implications for cross-border transactions.

Outbound investments

In late November and early December of 2016, several government agencies, including the PBOC, National Development and Reform Commission (NDRC), State Administration of Foreign Exchange (SAFE) and Ministry of Commerce (MOFCOM), issued joint statements to enhance efforts to authenticate outbound investments and crack down on fake cross-border transactions.