China steps up scrutiny of capital flows as yuan depreciates

SHANGHAI, Feb 26 (Reuters): Chinese authorities are rolling out fresh measures to limit capital flight, including increased scrutiny of overseas investments, as the yuan currency comes under mounting pressure.

President Donald Trump's tariffs threats are heightening Sino-U.S. tensions and discouraging inbound foreign investment. The yuan has lost 2.2% to the dollar since Trump's election win in November.

China has increased scrutiny of overseas investments by domestic companies and their use of proceeds from Hong Kong share sales, Bloomberg reported citing unidentified sources this week.

Meanwhile, China's commercial banks sold the most foreign exchange to their clients since July last month, official data showed, showing rising demand for foreign currency. The conversion ratio - a gauge that measures households and corporates' willingness to sell dollars for yuan - fell to the lowest level in seven months.

Xinquan Chen, an economist at Goldman Sachs, said the current account showed sizeable currency outflows in January.

The wide gap between higher U.S. interest rates and falling Chinese yields has been a factor eroding the yuan's appeal with onshore investors. That yield gap hit its widest-ever level in January.

"Weak domestic demand and low interest rates present major structural headwinds for the yuan," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.