A State Council circular calls for stricter controls by banks on the sale of foreign currency and for central government control over the issuing of foreign debt.

At present, local government bodies can offer guarantees to foreign-funded projects and issue overseas debts - mainly through local International Trust and Investment Corporations.

The government is afraid that if there was a run on its currency, high foreign indebtedness would become much more expensive to repay, as in the rest of Asia, causing severe economic problems.

Protecting the yuan

Officially China has pledged to defend the yuan, its currency, which is not traded freely on international markets.

The renminbi is the version of the currency used for international transactions, and its rate has been fixed to the dollar.

But many Chinese apparantly believe that the currency could fall victim to a devaluation, and are secretly moving their money into foreign currency accounts.

In the first eight months of 1998, despite a trade surplus of $31bn, China's foreign currency reserves hardly increased - pointing to a serious leakage of money.

Estimates of the flight of capital flight from China in 1997 range from $15bn to $25bn.

And the black market exchange rate in Beijing has risen to RMB 8.9 to the dollar, compared to the official rate of 8.28.

State crackdown

In recent weeks the State Administration of Foreign Exchange has intensified its crackdown on illegal foreign exchange dealings.

The government has made breaching foreign exchange regulations a criminal offense. And it is trying to set up a computer database linking banks, customs, and foreign exchange departments to monitor the flow of hard currency to exporters.

Many exporters are suspected of trying to hoard their foreign currency in overseas accounts, sometimes by falsifying invoices.

But with low yuan-denominated interest rates, and the devaluation risk, they have little incentive to move money back to China.

Observers say that administrative measures will have little impact on the long-standing practice.

One reason China is tightening up its currency regulation is to boost reserves, which will be needed in any defence of the currency.

But despite the Asian turmoil, China's long-term aim of joining the international trading system will require a free flow of capital - and eventually a floating currency.