China’s one-sided capital account controls face backlash as US weighs curbs on investment

Beijing’s policy of strict controls on outbound capital is facing backlash in Washington and causing potential investors to drag their feet, analysts say

White House is reportedly discussing ways to restrict US capital flows into China amid ongoing trade war

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The Chinese government has been pulling out all the stops to woo investment from foreign firms, but the country maintains strict capital account controls over outbound payments. Photo: Reuters

Published: 2:30pm, 30 Sep 2019Updated: 11:37am, 1 Oct 2019

China’s one-sided capital account controls, which encourage inflows but curb outflows, have started to see a backlash from the United States and institutional investors, a development that could cut the country’s financial links with the rest of the world.

The Chinese government is pulling out all the stops to woo investment, including rolling out the red carpet for electric car maker Tesla, scrapping quotas limiting foreign investment in onshore stocks and bonds, and lobbying global indices to include Chinese securities in their investment benchmarks. At the same time, Beijing has maintained its strict capital account control over outbound investments and payments.

The strategy received a blow last week, however, when it was reported Washington is considering curbs on US investors’ portfolio flows into China, as well as blocking Chinese companies from listing shares on US stock exchanges. The US Treasury later said that it is not considering blocking Chinese firms from accessing US capital markets “at this time”.

The news came after the investment index provider, FTSE Russell, decided last week not to include China in its flagship World Government Bond Index, meaning the country is missing out on billions of dollars of extra investment each month.

The hallmark of a mature financial market, is that anybody who wants to participate in it can come in and can come out

Marie Owens Thomsen

The decision reflects caution among global institutional investors over China securities, although Bloomberg Barclays began adding Chinese sovereign debt to its aggregate index in April and JPMorgan Chase is expected to start including some Chinese bonds in February.

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