Offshore foreign exchange and the yuan
The value of the Chinese currency depends to a great extent on Beijing’s ability to control capital flows. Over the past decade there have been numerous channels devised to bypass regulations, including false invoicing of manufactured goods, inflated service fees (expensive consultants abroad), the purchase of assets with no inherent value, and inter-company transactions, which by their nature are difficult to track. Recently, we have been told that Beijing has ordered state firms to repatriate capital, in many cases, via Hong Kong’s stock connect channel, to make these flows appear to be foreign investments in domestic equities. In this research, we attempted to analyse “ownership” of offshore capital – we admit this is nearly impossible, so the data is more “indicative” than provable. However, the basic point remains – as a strong state with a closed capital account, the government has many levers at its disposal to control capital flows, most of which are non-transparent. Much of this control is directed at the state owned banks.
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