December 07, 2016 10:24 AM
Residents walk past board highlighting the security markers on the latest Yuan note outside a bank in Beijing, China, Nov. 24, 2016.
BEIJING — Nearly two years after encouraging Chinese companies to go on an acquisitions spree overseas, stirring global markets, Beijing is asking them now to pull back. For the first time, China is also tightening its scrutiny of bogus overseas fund transfers of its currency, the yuan, or RMB, to clamp down on what it calls “irrational” investments.
Analysts have said the moves are, in part, contingencies against possible actions by U.S. President-elect Donald Trump, who has pledged to use tough trade tactics with Beijing and stop China from “stealing American jobs.” Trump has promised to declare China a “currency manipulator” and impose a 45 percent duty on Chinese goods.
Trump factor
China is also trying to avoid a currency crisis that its companies’ massive transfers of funds overseas is hastening. The RMB has slipped recently to an eight and a half year low and analysts are predicting a further slide by the time Trump takes office next month.
“China has been worried about what could happen to the dollar with Donald Trump becoming president,” said Julian Evans-Pritchard, China economist with Capital Economics in Beijing. “It is controlling capital outflows as a pre-emptive measure.”
Fraser Howie, co-author of the book “Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise,” said that while Trump certainly complicates the situation for Beijing, the moves reflect the Chinese government’s continued need for control and aversion to market forces.
“The concern for [Chinese] policy makers is that the markets get ahead of them,” Howie said. “They want a weaker RMB, but they want a slower descent. They don’t want markets telling them what to do.”
At the same time, though, he adds that “Trump must worry the Chinese leadership.”
“For too long China has gotten its own way, getting the benefits of global trade yet restricting foreign companies in many ways,” Howie said.
Evans-Pritchard adds that while people will still find ways to get funds out of the country, a key aim of the increased controls is to prevent large outflows, but not turn off the tap entirely.
“Outflows in RMB have become a major problem in recent months,” he said. “It is easier for Chinese companies to send out RMB as compared to foreign currencies.”
Bogus investments
Last year, investments overseas surged to $187 billion and outbound investments reached similar levels in just the first three quarters of this year. China has been encouraging foreign acquisitions to expand its economic reach across the globe, but authorities have also found that many investments are fronts to funnel funds out of the country.
Outbound investments have been seen as “increasingly frivolous FDI by Chinese firms around the world – copper smelters, buying online gaming companies etc. – in sectors they don’t know anything about,” said Jacob Kirkegaard, an economist with the Peterson Institute for International Economics.
According to a recent report, published by China’s National Bureau of Statistics and State Administration of Foreign Exchange, last year a large portion of investments by Chinese firms overseas went into accounts in tax havens such as Hong Kong, the Cayman Islands, Bermuda and other locations.
Just this week, the People’s Bank of China – China’s central bank – said Chinese companies that want to make overseas loans will need to obtain permission from regulatory authorities first.
The bank also said that loans should not be more than 30 percent of the Chinese companies’ net assets. The new rules could be a serious challenge for many of China’s leading companies, as it is widely known that they underreport their assets.
Psychological hedge
The announced regulations come as China’s currency continues a year-long slide. Most recently it has been trading at around 6.9 yuan to the U.S. dollar, but analysts are already predicting that it could cross the psychological barrier of seven yuan to one U.S. dollar by the time Trump is sworn into office six weeks from now.
In addition to controls for loans, the government has also ordered banks to report every foreign fund transfer that exceeds $5 million to regulators and to obtain permission from authorities for transfers over $10 million.
The controls are a sea change from the situation that existed until last month, when billion dollar deals by major state-run and private-run companies were made every month. The tight controls aim to plug a loophole, analysts note, that previously allowed people to move Chinese currency overseas and then convert it to foreign currencies.
Foreign currency transfers from China are not allowed without permission, but until now RMB transfers were. And with increasing downward pressure on China’s currency, the government is trying to cut down the flow of hot money out of the country.
“The problem the government faces is that if Chinese savers become convinced that a large depreciation of the RMB is coming, they will do almost anything to take money out of RMB and likely into the U.S. dollar,” PIIE’s Kirkegaard said.
Given that the market still thinks the RMB is significantly overvalued, the government’s battle is far from over. And if President-elect Trump carries out his threat to declare China a currency manipulator, or enact stiff tariffs on Chinese imports, that struggle could get even more intense.
