China’s foreign exchange regulator implements new regulation to limit capital outflow

China’s State Administration of Foreign Exchange recently announced a new regulation to tighten controls on overseas transactions, in an attempt to control capital outflow and protect the yuan. The Chinese forex reserves shrank by about a quarter from US$3.99 trillion in June 2015 to US$3.05 trillion in November 2016, according to an article from the South China Morning Post. This year, it experienced a further drop, falling below US$3 trillion for the first time in nearly six years. Starting from 1 September, Chinese banks are required to report any overseas credit card transactions above 1,000 RMB (S$203) to the regulator. Today, credit cards are used as the primary overseas payment method, with over US$120 billion in total credit card overseas payments in 2016, according to an article from Xinhuanet. Other overseas payment methods include mobile payment methods such as WeChat Pay and Alipay.

Many consumers have expressed concern over the new regulation, as it is very easy to spend more than 1,000 RMB overseas. There were about 135 million mainland Chinese tourists who went abroad in 2016, spending a total of US$261 billion (each mainland Chinese tourist spent around US$2,000). This is almost twice the spending of U.S. tourists who travel abroad. However, the regulator has stressed that the information collected by the banks will not result in any increase in costs or restrictions for consumers.

This is not the first time China has tried to control credit card overseas spending. In March this year, China UnionPay forbade mainland Chinese consumers from using their UnionPay cards to purchase properties in Hong Kong. Also, starting from December 2016, UnionPay card holders were only allowed to withdraw up to 5,000 MOP from the ATMs in Macau. The new regulation has been interpreted by the industry as another attempt to limit capital outflows, as many casino visitors will bypass the withdrawal cap by using their UnionPay credit cards to purchase goods, and then return the goods in exchange for cash.

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