Chinese Capital Constraints Are Being Loosened To Attract Much-Needed Global Investment

China is taking a huge step towards easing its rigorous capital controls as it strives to attract international investors by allowing foreigners in Shanghai and Beijing to move their money freely into and out of the country. It states that the funds have to be “real and [legally] compliant” and linked to their investment in Chinese.

The announcement of the news came shortly after official data revealed that the level of foreign direct investment (FDI) in the nation had fallen to a record low for a quarter due to a decline in business confidence.

According to a statement from the city government published Thursday, foreign investors, whether they are people or businesses, can transfer their funds without any restrictions or delays to the Shanghai pilot free trade zone, where tens of thousands of businesses are situated.

According to the statement, the money must be “real and [legally] compliant” and tied to their Chinese investment. The regulations went into force on September 1, although they do not apply to citizens of mainland China.

One of China’s largest and just slightly smaller than Seattle is Shanghai’s free trade zone.

The country’s headquarters for hundreds of international corporations, including HP, AstraZeneca, and BlackRock, as well as Tesla’s Gigafactory, are located there.

The Beijing city administration also put up identical rules that day, promising to make it easier for international companies to transfer money across borders. It wants the public’s opinion on the plan.

According to the government, the objectives of the policies are to draw international investment and create an open economy.

China maintains a “closed” capital account, which implies that businesses and people cannot transfer funds within or outside of the nation unless they follow tight regulations.

Since the beginning of April, the Chinese renminbi has fallen more than 6% versus the US dollar as economic development slowed and the Central Bank of China loosened monetary policy more quickly than its Western counterparts. A weak currency could make a nation less attractive for investment and hasten capital outflow.

The actions taken on Thursday represent the government of China under leader Xi Jinping’s latest attempt to attract international investment and mend relations with the West.

According to figures released by the State Administration of Foreign Exchange last month, a measure of FDI in China plummeted in the second quarter, reaching its lowest level since 1998, when records first started.

Separate data released on Sunday by the trade ministry revealed that its FDI metric fell more than 5% in the first eight months of 2023 compared to the same period the previous year.

Lack Of Assurance

There is a clear decline in business confidence among American companies operating in China.

Only 52% of respondents to a survey conducted by the American Chamber of Commerce in Shanghai on Tuesday expressed optimism about their five-year business outlook, the lowest percentage since the survey’s inception in 1999. Comparatively, that to 78% in 2021 and 55% in 2022.

Bottom Line

The second-largest economy in the world is facing increasing risks, including a slowdown characterized by weak domestic demand and a housing crisis, Beijing’s desire to prioritize national security over economic growth, and deteriorating ties between China and many Western nations. These risks have caused foreign businesses and investors to become more cautious.