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Here's why China is closing foreign exchange loopholes - and Greece loosening them

China is cracking down on some of the ways people move large sums of money out of the country, as it battles with the problem of capital flight.

The State Administration of Foreign Exchange (Safe), the unit of the central bank responsible for policing the currency, has ordered banks to strengthen controls on all foreign exchange transactions, according to a report from the Financial Times.

The SAFE is paying particular attention to people who fiddle contracts for imports and exports as way of moving money out of the country without declaring it — a ruse which involves over-billing for goods not delivered.

Meanwhile, it’s a different picture in Greece, which is moving to liberalise its foreign-exchange market a bit, as Europe takes a breather from the sovereign debt crisis.

Francois Cabau and the Economic Research team at Barclays said in a note today that the Greek Finance Ministry eased capital controls on Wednesday allowing more money to flow out of the country.

Big companies were allowed to double their daily limit on international payments from €7 million (£5 million) to €14 million (£10 million).

Capital flight is a big problem for a slowing economy. For China, the money flows out of the country have had several knock-on effects. Mostly, it’s made it more expensive to support the currency because sending money overseas creates a higher demand for assets not denominated in yuan, pushing down the price of the currency.

It’s also battling slowing inflation. Analysts Xiaojia Chi and Sylvia Sheng at Bank of America Merrill Lynch note that “domestic liquidity has become tighter partly due to capital outflows and PBoC’s FX intervention.” The money that’s left in the country is sloshing around at a slower rate.

Producer price inflation, which is an indicator of wholesale demand, is down at six-year lows in China:

China inflationBAML

If Greece is loosening capital controls and China tightening, it shows the differing levels of confidence between the two.

It’s an insider play. The tight foreign exchange rules are a sign that the richest people and most liquid companies think their money is safer out of the country than in.

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