Impact of capital outflow rules debated

As China takes steps to control the outflow of capital from the mainland, large-scale investments in the US could be affected, while the move also may help tame rising tensions between the two countries over access to Chinese markets, observers said.

Chinese officials may be setting up new roadblocks to capital outflows, as officials won’t approve requests to ship the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason, Bloomberg reported Wednesday, citing people familiar with the measures drafted by the People’s Bank of China (PBOC).

Officials from the PBOC, the National Development and Reform Commission and other government branches said Monday that the country will continue to promote the healthy development of outbound foreign direct investment (FDI) through more stringent screening.

“It is smart to use administrative measures to reduce capital outflows and defend the exchange rate, because China’s foreign reserves are dropping,” Ken Cheung, a Hong Kong-based Asia currency strategist at Mizuho Bank Ltd, told Bloomberg. “Chinese authorities understand the capital outflow pressure is persisting, but will only let it run its course at an orderly pace.”

Jian Yang, director of the Center for China Financial Research at the University of Colorado-Denver business school, wrote in an email that the policy change on outbound investment probably will have some affect on Chinese firms’ investment in the US, particularly on large-scale investment projects in the US initiated by Chinese firms.

“Nevertheless, the potential impact might not be as bad as many might think as very large investment projects including mega-merger and acquisitions by Chinese firms often did not materialize due to US national security concerns,” he said.

Yang also noted that many overseas investments failed to produce value-enhancing results for Chinese companies, and research shows that unrelated business diversification within the same country often is value-destroying.

A Rhodium Group report showed Chinese FDI in the US exceeded $18 billion in the first half of the year. The total for 2015 was $15.3 billion.

Chinese firms have been scooping up everything from movie studios, appliances and a stock exchange as the companies try to improve their global competitiveness and counter slowing growth in China.

The shopping spree also attracted political attention as the US-China Economic and Security Review Commission urged Congress to ban China’s state-owned firms from acquiring US companies.

“One implication could be that with a decline of major Chinese M&A’s, the critical attention that Chinese FDI receives in the US (and elsewhere) might lessen,” said Karl Sauvant, a resident senior fellow at the Center on Sustainable Investment at Columbia University.