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China Tightens Penalties Against Illegal Foreign Exchange Trading

Maya Mandzikasvili | Feb. 14, 2019
China Tightens Penalties Against Illegal Foreign Exchange Trading

February 14, 2019, | AtoZ Markets - According to the local news sources, China has begun cracking down on individuals and corporations that buy or sell foreign currency on the black market. How the new foreign exchange regulations in China could be interpreted and what are the criminal penalties for illegal foreign exchange trading in this country?

New penalties in brief

Representatives of the authorities of the Middle Kingdom explain the need of the new regulations by saying that the government seeks to control the outflow of capital and maintain stability of the exchange rate of the yuan and the slowdown of its economy. According to the joint judicial interpretation of the Supreme Court and the Supreme Prosecutor’s Office, which entered into force in early February, illegal trade in the Forex market will be criminalized and those who involved in illegal business activities.

A total transaction amount of 5 million yuan (737,000 US dollars) or illegal profits of 100,000 yuan (14,749 US dollars) will be considered a “serious” crime and provide for imprisonment of up to five years and a fine of up to five times profits.

An “extremely serious” violation, defined as cumulative transactions totaling more than 25 million yuan (3.69 million US dollars) or 500,000 yuan (73,745 US dollars) in the form of illegal profits, can be punished with imprisonment of more than five years and a fine of up to fivefold profit or confiscation of property.

An “extremely serious” violation, defined as cumulative transactions totaling more than 25 million yuan (3.69 million US dollars) or 500,000 yuan (73,745 US dollars) in the form of illegal profits, can be punished with imprisonment of more than five years and a fine of up to fivefold profit or confiscation of property.

The announcement of an increase in penalties was made before the beginning of the week on a long lunar New Year's holiday, during which the demand for foreign currency rose sharply, as more than six million Chinese traveled abroad.

Strict regulations supposed to maintain yuan stability

Beijing strictly controlled capital outflows, since the massive capital outflow in 2015–2017 had a serious downward pressure on the yuan, forcing the authorities to spend at least one-fifth of the country's currency reserves to protect the currency.

At the moment the Chinese government allows each person to buy up to $ 50,000 a year in foreign currency and prohibits large “irrational” outgoing investments, such as the purchase of hotels, real estate, sports clubs and entertainment facilities.

Shen Jiangang, chief economist at JD Digits, explained a new government initiative to tighten the rules for currency trading saying following:

“Government rules "were established to prevent illegal capital outflows and maintain the stability of the yuan”

Despite China-US trade war, Shen predicts that the RMB exchange rate will rise to 6.5 against the US dollar by the end of the year, which is far from the market panic three months earlier, that the currency will fall below 7 to the dollar. In recent months, capital inflows have increased significantly, which means that foreign investors have gained greater access to the country's equity and bond markets through the Hong Kong Connect program.

New Chinese policy will minimize risks from uncontrolled market operations

According to China Merchants Securities, foreign institutions increased their ownership of RMB-denominated bonds by 582.5 billion yuan (85.91 billion US dollars), an increase of 68% over the same period last year. In addition, foreign parties invested about 300 billion yuan ($ 44.25 billion) in the Chinese stock market through Stock Connect programs and qualified foreign institutional investors last year. China's central bank is trying to invest an additional 110 billion dollars in the economy. Tan Yalin, president of the China Institute for Investment Research in Forex, based in Beijing, noted that the government’s policy supposed to prevent financial risks from unregulated shadow market operations. "The black market poses a threat to the banking foreign exchange market and the government's control over capital," said Tan.

"Underground banks are one of the main ways people in China use to transfer money from the country, and therefore they are the main goal of suppressing the government in recent years", president of the China Institute for Investment Research in Forex added.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.