Update on Inbound Foreign Direct Investment from China
Chinese regulatory authorities have taken an important initiative to encourage outbound FDI from China. U.S. private equity funds and other owners of businesses desiring investment should take note of these changes. These developments also are significant for investment bankers and other intermediaries, as the steps should enhance their ability to broker strategic arrangements.
In June, China’s State Administration of Foreign Exchange (SAFE) announced that new regulations loosening its control on outbound investment procedures would take effect on August 1. SAFE will also modify its controls over foreign exchange management of domestic companies with overseas investments. The announced policy purposes of the modifications are to:
- stabilize external demand for domestic products;
- increase the efficient use of funds by Chinese enterprises; and
- support the “go global move” of enterprises “of diverse ownership” to stimulate exports.
The major changes that SAFE announced are:
- “qualified enterprises of diverse ownerships” now can make overseas loans;
- sources of funds for overseas ownership are expanded and can include self-owned foreign exchange and foreign exchange purchased with Chinese currency;
- streamlining of procedures for overseas lending, which will be decentralized; and
- improvements to statistical monitoring of, and risk prevention for, overseas lending.
In a related development, a former assistant professor of economics at an Indiana university has been promoted to chief of SAFE. The appointee, Yi Gang, is also a vice governor of the Peoples Bank of China. Mr. Yi taught at Indiana University-Purdue University Indianapolis from 1986 to 1994.
The changes announced by SAFE are likely connected to China’s accumulation of foreign exchange. The Financial Times reported on July 15 that China’s foreign reserve position had increased beyond $2.1 trillion. The merge results from capital inflows to take advantage of faster economic growth and inflating asset prices. These trends arise from the view that China’s economic recovery will be sustained, with GDP growth for the second quarter of 2009 expected to approximate 8%.
The Contrarian Investor’ Journal has opined that the next logical step will be towards the eventual float of the RMB, cautioning that the float will not happen imminently.
