China FX regulator says strengthening supervision of forex market

BEIJING (Reuters) - China's foreign exchange regulator said on Monday that it will strengthen supervision of the forex market in 2017, while improving policy transparency and promoting the further opening of financial markets.

Chinese authorities have taken a raft of steps in recent months to curb capital flight from the country to support the weakening yuan currency, while trying to attract more foreign investment.

Pan Gongsheng, head of the State Administration of Foreign Exchange (SAFE), said that China's foreign exchange market was relatively stable and cross-border capital flows were becoming more balanced, according to a statement posted on its website.

In a step to bolster the bond market, SAFE also announced on Monday that it would allow foreign investors in the interbank bond market to trade derivatives for the first time in an attempt to make the market more attractive.

Beijing opened up its interbank bond market to more types of foreign investors in February 2016 and relaxed foreign exchange repatriation rules in May.

The introduction of derivative trading for foreign institutions "will make it more convenient for (them) to manage their foreign exchange risk and is a move to promote the opening reforms of the bond and forex markets", it said.

By the end of last year, foreign investors held 870 billion yuan ($126.7 billion) worth of bonds in the Chinese market, an increase of 83.4 billion yuan from the year before, SAFE said.

Meanwhile, the authorities have cracked down on underground banks that have been accused of helping people spirit cash out of the country.

SAFE recently uncovered an underground bank in the southern Chinese city of Shenzhen involving 50 billion yuan ($7.3 billion), and cases of firms' using fake documents and fake trade deals to transfer foreign exchange overseas.

Last year, Chinese police busted more than 380 underground banks, involving more than 900 billion yuan, and arrested more than 800 suspects, the Ministry of Public Security said in an online statement published on Sunday.

"Underground banking has become a major channel used for money laundering and illegal cross-border transfer of funds," the ministry said.

"(It) creates a huge 'black hole' of funds, severely disrupting normal financial supervision order and endangering economic safety of the nation."

China's foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years.

But the January decline was the smallest in seven months, indicating China's renewed crackdown on outflows appears to be working, at least for now.

A recent pullback in the dollar after a multi-month rally has also helped ease pressure on the yuan and other emerging currencies, though most analysts expect depreciation pressure to resume soon as the U.S. central bank positions for what could be several interest rate increases this year.

($1 = 6.8691 Chinese yuan)

(Reporting by Beijing Monitoring Desk and Kevin Yao in Beijing, John Ruwitch in Shanghai; Editing by Kim Coghill and Jacqueline Wong)