No firm outlook for Safe forex funding scheme

Regulator plans to deploy foreign exchange reserves to finance companies' offshore push

PUBLISHED : Wednesday, 16 January, 2013, 12:00am
UPDATED : Wednesday, 16 January, 2013, 3:41am

With no details to go on, economists say it's tough to predict the impact of a special office set up by the country's foreign exchange regulator to help fund overseas expansion of Chinese firms.

The State Administration of Foreign Exchange (Safe) has established a co-financing office to "innovatively" use the country's US$3.3 trillion in foreign reserves by helping banks to extend foreign-currency loans to support mainland companies seeking a global footprint.

The "innovation", announced by the regulator on Monday, is widely believed to have resulted from the low returns from existing investments of foreign reserves.

"It's an interesting exploration of the use of foreign reserves, but at this stage, there are big uncertainties over how it will work," said Tan Yaling, president of the China Forex Investment Research Institute, a Beijing-based think-tank.

The Safe office will "respect market rules", "make arrangements in accordance with industrial common practices", and "maintain and promote fair market competition", the regulator said in its statement.

Safe started pilot schemes in this direction with banks, including China Development Bank, about two years ago. In the trials, banks received intermediary fees for managing the loan risks for Safe. The loans funded several overseas energy deals of state-owned enterprises, bankers said.

Outbound investment by mainland companies has surged since 2008 as China has sought a bigger international presence.

In the first 11 months of last year, the country's outbound direct investment from non-financial firms totalled US$62.5 billion, up 25 per cent from the year before - well above the 14 per cent growth for all of 2011. Natural resources have been a hot target for these investments.

Safe's funding of Chinese firms' overseas mergers and acquisitions might increase the hostility of some countries already suspicious of Chinese money buying up key resources, economists say.

Jin Liqun, chairman of China Investment Corp's board of supervisors, has suggested Chinese companies "adopt a low profile" while looking for overseas acquisitions to avoid controversy. The US$482 billion sovereign wealth fund made a 4.3 per cent loss on its overseas portfolio in 2011.