SHANGHAI/HONG KONG: China is stepping up measures to stem capital outflows after its yuan currency skidded to more than eight-year lows, sources said on Tuesday, taking aim at outbound investments that have soared to a record high.

The State Administration of Foreign Exchange (SAFE) has begun vetting transfers abroad worth $5 million or more and is increasing scrutiny of major outbound deals, even those with prior approval, sources with knowledge of the new rules told Reuters.

Capital outflows, both legal and illegal, have pressured the yuan. The Chinese currency has depreciated nearly 6 percent against a strong dollar this year and many traders are betting on further losses, raising the spectre of more capital flight.

The new rules would govern transfers abroad under the capital account for transactions such as portfolio or foreign direct investment, and could knock some momentum from China’s overseas asset shopping spree, analysts say.

Chinese outbound investment deals totalled $530.9 billion in the first nine months of 2016, surpassing 2015’s record volume and helping China outstrip the United States as the top acquirer for foreign companies, Thomson Reuters data show.

“The new rules will have a very big impact on outbound deals,” said Luke Zhang, a partner at Zhong Lun Law Firm, who expects the number of deals to go down “quite a lot”.

SAFE always supports legitimate and compliant overseas direct investments, the regulator said on its microblog late on Tuesday.

“Previously, only forex transfers worth $50 million or more needed to be reported to SAFE. Now, the threshold has been drastically lowered to $5 million, and covers both foreign currency and yuan,” said one of the sources with direct knowledge of the rules.

“All we can do is to ask clients to be patient, and tell them that the transaction is being vetted by SAFE for authenticity and may not be approved.” One of the sources said that even if an outbound investment had already obtained approval to buy foreign exchange, but the money had not been fully transferred, the remainder of the quota was now subject to further approval if it exceeds $50 million, which is regarded as a “large sum”.

Two other sources confirmed the new rules.

The sources said the forex regulator told banks about the new rules on Monday, the same day the government said it would stick to its “going out” strategy of encouraging outbound investment.

China has been using its foreign currency reserves to keep the yuan from falling too rapidly against the dollar, managing market expectations, and restricting outflows into overseas securities.

Wang Zhenying, a senior Chinese central bank researcher, said in a recent interview that Beijing needed to stem outflows that risk putting the yuan into a potentially destructive feedback loop.

“At the moment, the fall in the yuan’s exchange rate is shaping market expectations. Depreciation triggers capital flight, and capital flight exerts even bigger pressure on the yuan,” Wang said.

“Therefore, it’s necessary to break this feedback loop... for example, by slowing capital outflows,” he said.

Chinese state-owned banks were seen selling dollars in the onshore foreign exchange market for a second straight day on Tuesday, in what traders called a bid to support the yuan.

The yuan has rebounded around 0.5 percent in the past few sessions.

While still the largest in the world, China’s foreign currency reserves have fallen to $3.17 trillion at the end of September from a $3.99 trillion peak in June 2014, indicating that authorities sold dollars to prop up the yuan’s value.

Selling of the yuan and other emerging market currencies has intensified since Donald Trump’s upset presidential victory on Nov. 8. Expectations of higher fiscal spending and interest rates under a Trump administration have boosted US bond yields and the lure of the dollar.—Reuters