Watchdog on capital outflows embarks on a role reversal

PUBLISHED : Thursday, 10 June, 2004, 12:00am
UPDATED : Thursday, 10 June, 2004, 12:00am

The gatekeeper set up to stop money flowing out of China is wearing a new hat - as a facilitator of outward investment.

At a recent seminar, Wei Benhua, deputy director of the State Administration of Foreign Exchange (Safe), said his office was no longer focused only on preventing capital outflows.

Instead, he said Safe was a 'service centre' aimed at helping domestic investors buy into the global economy.

Mr Wei said: 'Investing globally is a national strategic concern. We realise we must encourage you to invest globally. We must do this to upgrade our industries, our technology, to further reform our markets along global standards.'

Just five years ago, Safe would not have encouraged Chinese entrepreneurs to send money abroad. After all, the organisation was created to keep money - primarily foreign exchange - in China.

As recently as the late 1990s, China had a serious capital-flight problem, but the trend has reversed in the past two years. Officials speculate that a significant portion of 'hot money' coming from tax havens in the Caribbean may be funds siphoned out of China years ago.

According to a recent study by the Academy of International Trade and Economic Co-operation under the Ministry of Commerce, a lot of the 'hot money' may have come from illegal asset-stripping.

Whatever the origins of China's US$440 billion in foreign exchange reserves and recent foreign direct investment, the economy now has a problem opposite to what it had before: a huge capital surplus. Easy access to bank loans has led to a flood of investments in questionable projects, especially in property. The amount of 'irrational' investments has been so worrying that Premier Wen Jiabao sent teams to the provinces to halt lending in key sectors.

Now Safe is beginning to encourage domestic enterprises to invest abroad, in a bid to shift their focus away from overheating sectors.

The policy change will also allow competitive enterprises to expand globally. Since economic reform began in 1978, Chinese enterprises have invested only US$11 billion abroad.

Mr Wei said: 'Our strategy focuses on encouraging our best enterprises to go global and invest in strategic industries such as natural resources, construction and engineering, value-added manufacturing and even the export of our expertise.

'Only by having a global network can our industries be globally competitive.'