Letter of credit (L/C) business between Hong Kong and China is waning due to capital controls introduced by Beijing as it endeavours to stem the flow of cash out of the country.

The capital controls are central to the government's efforts to protect foreign exchange reserves and prop up the renminbi (RMB).

Dwindling reserves

China's foreign exchange reserves slipped to below US$3 trillion in January for the first time in nearly five years.

This was the seventh consecutive monthly decline, and the authorities are now acting to make it even harder to move currency out of China.

Deals frustrated

Reports suggest that one way they are doing this is by introducing many new checks and controls that do not require new legislation but are frustrating efforts to conclude deals.

This is reducing L/C volumes and dramatically diminishing the RMB's share as a global payment currency.

Dramatic decline

The Chinese currency is now the seventh most used global payment currency, accounting for only 1.6 per cent of all payments.

SWIFT's tracker of the Chinese currency now shows that RMB payments in April, in terms of value, suffered a drastic drop of 24.24 per cent from March.

Sharp contrast

This compares sharply with nearly two years ago when the RMB increased its share in the global issuance of L/Cs and entered the top four of world payment currencies by value in August 2015.

The Chinese currency overtook the Japanese Yen with a record high share of 2.79 per cent in global payments to take its fourth position (DC World News, 14 October 2015).

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