China's foreign exchange watchdog Thursday said it will tighten up on offshore funds flowing into foreign companies' coffers in a bid to thwart currency speculation and slow growth in foreign debt.
"The new rule will help to crack down on illegal forex speculation, curb the fast growth of capital inflows and foreign debt, and maintain a stable monetary policy and rate of exchange for the yuan," the State Administration of Foreign Exchange (SAFE) said in a statement.
With Beijing under pressure from major trading partners to re-value its currency, speculative funds, or "hot-money", have poured into the country on expectations of a revaluation of the yuan.
The influx is problematic for China as it forces banking authorities to run mopping-up operations to soak up excess liquidity that otherwise builds up inflationary pressure as banks flush with cash eagerly lend out the new funds.
Authorities fret that companies may also be using borrowed funds to speculate on an eventual currency adjustment.
Following investigations last year, SAFE found foreign companies were using offshore funds in China to conduct business that "went beyond normal operations". Many Chinese holding companies are registered as foreign entities in tax heavens such as the Virgin Islands.
Now, when applying to bring in foreign exchange funds of 200,000 dollars or more, foreign-invested companies must present documents explaining the use of the funds, the forex regulator said.
On approval, banks must then transfer the money directly to the payee, instead of allowing the funds to be sent to the foreign company itself for future use.
Xinhua news agency, meanwhile, said the government is drafting rules allowing qualified domestic companies to invest their foreign exchange funds abroad, a long awaited plan that has yet to reach fruition.
Such a move would also help China by encouraging foreign currency outflows instead and easing pressure on the yuan.