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  • Aug 28, 2014
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Economists welcome further levelling of China's playing field

Beijing's move to loosen regulations on money flows seen as welcome step towards reform outlined at recent third plenum, say economists

PUBLISHED : Thursday, 30 January, 2014, 5:01am
UPDATED : Thursday, 30 January, 2014, 5:23am

Looser regulations on inward and outward bound investment will give firms greater operational autonomy and reduce the need to curry favour with Beijing while also helping mitigate speculative hot money inflows, say economists and investors.

"This is in line with the deepening reforms that Chinese leaders were presenting during and after the third plenum in November. Generally, China will welcome and facilitate foreign and private sector investments through different policies," said Conrad Tsang, the chairman of the Hong Kong Private Equity and Venture Capital Association.

The changes are expected to be the first of many, given the central government's commitment at the third plenum to boost the economy and reduce red tape.

Under policies announced this week, inbound investment of up to US$300 million will no longer need the National Development and Reform Commission's approval except in industries where there is overcapacity or in property development.

The decision follows an earlier announcement last month removing NDRC approval requirements on outbound investment of up to US$1 billion.

Previously, mainland companies going overseas were also restricted in bidding for foreign assets if another Chinese firm was already interested, and the time lag involved in obtaining NDRC approval could jeopardise the likelihood of success.

"The move is consistent with other changes introduced by the central government, which is moving away its visible hand," said Societe Generale economist Yao Wei. "The government is making the country more business friendly. It has controlled too much in the economy."

But analysts do not think the NDRC's move will lead to a flood of inbound investments because of the gatekeeper roles played by the State Administration of Foreign Exchange and the Ministry of Commerce.

Yao cited the example of the free-trade zone in Shanghai, which forbids certain businesses in order to keep a tight lid on the capital account.

The mainland attracted US$117.59 billion in foreign direct investment last year, up 5.25 per cent from 2012. The reported value of outbound investments made by the country's non-financial enterprises in 2012 reached US$77 billion, representing a 44 per cent annual growth from 2003.

Mainland companies' overseas acquisitions have recently surged, with an annual growth rate of 31 per cent between 2005 and 2012, according to KPMG.

"This is significant. China is a significant driver in the global economy and specifically to emerging markets," said Rupert Purser, the chairman of ATTA, an organisation representing investment and corporate turnaround experts.

"At face value, China is becoming more of a level playing field for local and foreign investors - with a harmonisation of taxation, being one example."

According to Sean Darby, the chief global equity strategist at Jefferies, by providing a fast-track route for moving money offshore, the measures constitute another step towards exchange rate liberalisation.

"They are dealing with tremendous amounts of money coming from quantitative easing that have the potential to overheat their asset market, particularly property, and they are trying to look for ways to recycle the money back out of China," Darby said.

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According to Eswar S. Prasad, author of 'The Dollar Trap', the objective of fully opening the capital account (free cross-border capital flow) is even more important than developing Renminbi into one of the global reserve currencies.
With Renminbi becoming a reserve currency, it will be widely used in the international arena. The international status of China will be elevated, and China can borrow money cheaply from the other countries.
But not every thing is fine.
The demand for Renminbi will increase, causing a pressure for the currency to appreciate and hence weaken the competitiveness of China's foreign trade.
(Other countries will try to devalue their currencies against Renminbi to gain export advantages.)
To promote Renminbi as a reserve currency, China has to allow investors to invest in high-quality renminbi-denominated assets.
Which means she has to develop the corporate bond market, and issue more government bonds (central government treasuries and local government municipal bonds, etc.).
But without the required political and legal reforms, deep and sophisticated financial markets, a powerful central bank backed up by a tax-levying government, it's not easy for international investors to regard China as a safe haven.
 
 
 
 
 

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