[PEN-L:7679] China restricts yuan exchange

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Hong Kong Standard  Friday June 4 1999

Restrictions on yuan exchange spark jitters

           STORY: BEIJING is restricting the conversion of foreign
           currencies into yuan, a move that briefly sparked jitters
across
           the region yesterday that the yuan might be devalued.

           An advisory to foreign banks from the mainland's top
           commercial bank Bank of China (BOC) said their branches in
           the mainland and Hong Kong will be restricted from 10 June
           from converting foreign currencies into yuan.

           Shockwaves spread through Asian stock markets and
           currencies until Beijing offered assurances that it has no
plans
           to devalue the currency.

           The BOC move is apparently meant to close a loophole that
           currently gives foreign banks access to renminbi offshore,
           effectively creating a small hole in the mainland's capital
           account.

           Foreign banks can exchange until now up to 100,000 yuan for
           foreign currencies although transactions are limited to
buying
           yuan and they were restricted from selling yuan.

           ``My impression is the Chinese government wants a tighter
           grip on the yuan business. I heard people say this measure is

           in preparation for a devaluation, but I can't see what the
BOC
           preventing the conversion of foreign currencies into yuan
           have to do with a possible devaluation,'' said an Asian
banker.

           A currency dealer, who claimed to have spoken with some
           BOC executives, said the move was aimed at curtailing the
           outflow of yuan from the mainland. Worries have grown that
           an undetermined amount of yuan outside the mainland is now
           funding illicit businesses in Hong Kong and could be used in
           future to speculate against the yuan. The yuan at the moment
           can be bought at a cheaper rate of 1.15 to a Hong Kong dollar

           in the SAR than the official rate of 1.08.

           This gap could widen if yuan outflow remains unchecked,
           another dealer said.

           A tightening of foreign exchange regulations, just like
           Malaysia did last year, would make it more difficult to
           speculate against any currency.

           ``If you collect a considerable amount of yuan offshore and
           sell it to the BOC, you can make money. So the BOC doesn't
           want to buy from people who have arbitrage opportunities,''
           said the dealer.

           But a major downside of a closed foreign exchange market is
           that it makes doing business in the mainland less convenient.

           ``Everybody in need of yuan will have to go through the
           BOC,'' he said.

           ``Lots of small businesses will suffer from red tape when
           dealing with the BOC.''