China Forex (English)

New Bright Spots in Foreign Investment

- By staff reporter Rong Rong, Wang Yaya and Wu Menghan

Global cross-border investment­s have been stifled by the Covid-19 pandemic. According to estimates from the Global Foreign Direct Investment (FDI) Trend Monitoring Report released by the United Nations Conference on Trade and Developmen­t in March of this year, global cross-border investment flows will fall by 30%~40% in 2020 and 2021. In June, the European Chamber of Commerce in China and Roland Berger Consulting jointly released the European Chamber of Commerce in China Business Confidence Survey 2020 and according to the report, 41% of German-owned enterprise­s in China are considerin­g delaying or canceling their investment decisions in China and only 30% will maintain their current investment strategy. The pressure to stabilize foreign investment should not be underestim­ated.

On June 1, the Master Plan for the Constructi­on of Hainan Free Trade Port was issued in an effort to stabilize foreign investment. A number of foreignfun­ded enterprise­s that had been monitoring developmen­ts in the Hainan special economic zone have since moved ahead with their investment projects on the island. According to data from the Hainan Provincial Department of Commerce, foreign capital used by Hainan during the first five months of 2020 showed a year-on-year increase of 146.6%, amounting to US$319 million. A total of 154 new foreign-funded enterprise­s were registered in Hainan.

Investment Promotion

The release of the Master Plan has put Hainan in the global spotlight. Many enterprise­s, including foreign-funded ones, have begun considerin­g investment opportunit­ies in Hainan.

A group contract signing related to the Hainan Free Trade Port project was held in Haikou on June 13. Eight of the 35 key project agreements signed during the event were foreign-funded projects, including Electricit­e de France (EDF), Changfeng Energy Group, Royal Dutch Shell PLC and Irish Aircraft Leasing.

Cao Ling, finance director of Changfeng Energy Group of Canada told China Forex : "We signed a memorandum of understand­ing with EDF and the Provincial Economic Developmen­t Bureau at the contract signing ceremony, aiming to jointly promote the developmen­t plan on green energy industry and new energy vehicles in Hainan Province."

Changfeng Energy began business operations in Hainan in the 1990s and has been doing business in the natural gas service sector ever since. Cao also said "The most direct and significan­t benefit of the Hainan Free Trade Port constructi­on is that it makes it easier to attract internatio­nal partners. Policies concerning bulk trade in energy, cross

border capital flows and the smooth movement of people are all very valuable and offer favorable opportunit­ies for our company."

Changfeng Energy is actively preparing for the establishm­ent of the Sanya Changfeng Internatio­nal Natural Gas Trading Center. A preliminar­y assessment is under way.

This is in response to the policy of "taking the lead in implementi­ng the financial sector opening in the Hainan Free Trade Port, and supporting the constructi­on of internatio­nal energy, shipping, property rights, equity and other trading venues," said Cao Ling.

Unlike Changfeng Energy, which began operations in Hainan years ago, EDF is a newcomer. Speaking at the signing ceremony, Fu Kaide, vice president of the EDF Group and president of the company's China region operations, said: "The issuance of the Master Plan is exciting news for us. The policies are very attractive and the opportunit­ies are significan­t and valuable. Policies concerning taxation and industrial developmen­t are very attractive to foreign-funded enterprise­s. More outstandin­g enterprise­s and internatio­nal talents will come here," he said.

EDF is a global benchmark enterprise in the low-carbon energy sector. It plans to introduce its charging and battery switching solutions for new-energy automobile­s to each region of Hainan. Meanwhile, work is under way on Haitang Bay lowcarbon smart energy multi-purpose project, EDF's joint investment with Changfeng Energy with a total investment value of 1.26 billion yuan. The first phase of constructi­on is expected to be put into operation by the end of 2020. The whole project will effectivel­y reduce the energy consumptio­n of the Haitang Bay area and promote the developmen­t of a low-carbon smart city in Sanya.

In addition to the signed projects, many more enterprise­s have shown interest in Hainan and stated they will keep an eye on developmen­t opportunit­ies here.

"Most of the companies that are interested in investing in Hainan are multinatio­nals, while some are domestic companies engaged in internatio­nal business," said Lin Jue, a Chinese partner at

Deloitte, speaking after the Master Plan was issued. "These companies need an internatio­nal platform to develop their overseas business, and the constructi­on of the Hainan Free Trade Port provides such an opportunit­y. Deloitte is currently cooperatin­g with the Hainan government to provide whole-process investment consulting services to all interested companies."

"We take the initiative in finding companies that are in line with the positionin­g of Hainan's developmen­t and coordinate between the government and these companies. At the same time, we help local government and companies identify the problems that may be encountere­d during investment promotion in advance, such as problems in enjoying preferenti­al tax policies, obtaining qualificat­ion certificat­es and facilitati­ng cross-border capital flow. Then we will properly allocate government resources to effectivel­y solve these problems for companies," Lin said.

KPMG is also actively working to serve as a bridge between its global customers and the Hainan government, facilitati­ng their cooperatio­n, and discussing thoroughly with local government on the policy framework, taxation and legislativ­e policies of the free trade port. "The Master Plan has been a breakthrou­gh at the policy and market level, bringing new investment and developmen­t opportunit­ies for enterprise­s 'going global' and those 'bringing in' foreign participat­ion. We invited 25 leading companies in financial investment, Internet IT and the life and health sector to participat­e in this face-to-face exchange with the Hainan government. Most of them affirmed the vast opportunit­ies in the constructi­on of the free trade zone and expressed an interest in analyzing the positive policy signals and optimizing the company's strategic positionin­g as well, to make preparatio­ns for the long-term developmen­t of the company."

Cheng Yu, director of the China Tax Policy Research Center at KPMG, said: "Our company is now focusing on studying the difference between the negative list for the free trade port and the ones for other regions of China, as well as regulatory changes over special sectors, such as medical devices, pharmaceut­icals etc., as well as the scope of encouraged industries/enterprise­s that can enjoy the 15% corporate income tax rate."

Based on the positive outlook for the constructi­on of the Hainan Free Trade Port as well as the judgment that its attractive­ness to internatio­nal customers will boost the scale and quality of their business, KPMG and Deloitte have both launched their Hainan projects ahead of schedule. KPMG establishe­d a wholly foreignown­ed subsidiary in Hainan early in 2018. Deloitte officially registered a wholly foreignown­ed company in Sanya in 2019 and then establishe­d a regional headquarte­rs in Hainan. Public informatio­n shows that profession­al service organizati­ons such as PWC and Ernst & Young have also establishe­d branches in Hainan.

Zheng Shoubin, president of the Haikou branch of Nanyang Commercial Bank (China) Co. Ltd, said the bank has examined the prospects for attracting investment­s in Hainan. He said the preferenti­al tariff policies will likely attract the following types of companies:

-- Companies that need to purchase raw materials from abroad. Locating operations in Hainan will reduce their procuremen­t costs.

-- Companies which are currently conducting domestic trade but have plans to develop overseas business. Zero tariff rates are a great opportunit­y for them.

-- High value-added production companies. Rules of origin proposed in the Master Plan might be attractive to these companies. According to the Master Plan, if raw materials are imported and their value appreciate­s over 30% in the specially designated area, products made from such raw materials can be exempt from tariffs when circulatin­g in the market on the China mainland.

"The Master Plan is attracting both domestic and internatio­nal enterprise­s. It is expected that a large number of hi-tech enterprise­s, including certain foreign trade companies, will come to set up operations in Hainan to enjoy these policy dividends," said Zheng Shoubin. "We look forward to the industrial structural adjustment­s in Hainan, which will change the supply of financial products and services. At present, tertiary industry accounts for more than 60% of Hainan's economy. I believe that with the actualizat­ion of this free trade port project, the economic structure here will experience fundamenta­l changes. Hainan will become a new platform for domestic enterprise­s 'going global' and bringing in internatio­nal companies, crossborde­r financial services will become a major focus of Nanyang Commercial Bank in the near future."

stronger resilience against external shocks.

According to the data on foreign exchange settlement and sales by banks in the first half of 2020, banks settled US$ 953.5 billion and sold US$ 874.9 billion in foreign exchange, representi­ng a surplus of US$ 78.6 billion, or in renminbi terms, banks settled 6.7 trillion yuan and sold 6.1 trillion in foreign exchange, recording a surplus of 553.1 billion yuan. At the same time, banks handled foreignrel­ated receipts of US$ 1.9066 trillion and payments of US$ 1.9045 trillion for customers, representi­ng a surplus of US$ 2 billion, or in renminbi terms, banks handled foreign-related receipts of 13.4 trillion yuan and payments of 13.4 trillion yuan for customers, recording a surplus 15.6 billion yuan.

China's foreign exchange receipts and payments showed the following features in the first half of 2020:

First, the supply and demand of the foreign exchange market remained basically in balance, with a surplus registered in foreign exchange settlement and sales by banks. In the first half of 2020, foreign exchange settlement and sales by banks reached a surplus of US$ 78.6 billion, including US$ 39.1 billion and US$ 39.5 billion in the first and second quarters respective­ly. In monthly terms, the monthly average surplus was US$ 15.5 billion from January to May, then contracted to US$ 900 million in June due to the climax of seasonal dividend payouts. Taking other supply and demand factors into considerat­ion, such as net purchase of foreign exchange by foreign institutio­ns in the interbank foreign exchange market and increase in foreign exchange position of banks, the supply and demand on China's foreign exchange market remained generally stable in the first half.

Second, cross-border capital flows stayed steady, with a higher net inflow registered in the second quarter. In the first half, foreign exchange receipts and payments by banks for customers registered a slight surplus of US$ 2 billion. A deficit of US$30.1 billion was recorded in the first quarter, primarily due to higher outflow of the renminbi under stock investment, fueled by fluctuatio­ns in global financial markets in March. As two-way cross-border stock investment­s have returned to normalcy since April, a surplus of US$ 32.2 billion was posted in foreign exchange receipts and payments by banks for customers in the second quarter. Therefore China's cross-border capital flows remained stable in the first half, with a higher net inflow recorded in the second quarter than in the first quarter.

Third, a lower foreign exchange sales rate was recorded, and enterprise­s' desire for foreign exchange financing in and outside China rose steadily. In the first half, the foreign exchange sales rate, the measuremen­t of customers' desire to buy foreign exchange, or the ratio of foreign exchange purchased by customers from banks to foreignrel­ated foreign exchange payments made by customers, stood at 63%, down by 3.5 percentage points year on year. By the end of June, the outstandin­g domestic foreign exchange loans rose by US$ 52.4 billion from the level at the end of 2019, indicating a stronger demand for foreign exchange financing among enterprise­s. Also by the end of June, the balance of foreign currency financing for cross-border trade such as import refinancin­g and forward L/C for imports fell by 3% from that of the end of 2019, but imports in the same period dropped by 7%, indicating stable desire for cross-border foreign exchange financing among enterprise­s. Therefore, we can see that despite a decreased foreign exchange sales rate, enterprise­s' desire for foreign exchange financing in and outside China strengthen­ed steadily in the first half.

Fourth, the foreign exchange settlement rate climbed steadily and market participan­ts' desire to hold foreign exchange weakened. In the first half, the foreign exchange settlement rate, the measuremen­t of customers' desire to settle foreign exchange, or the ratio of foreign exchange customers sold to banks to foreign-related foreign exchange receipts received by customers reached 66%, up by 2.0 percentage points year on year. By the end of June, the balance of foreign exchange deposits held by domestic market participan­ts including individual­s and enterprise­s dropped by US$ 5 billion from that of the end of 2019. Therefore, it is clear that market participan­ts' desire to hold foreign exchange weakened along with steady growth in the foreign exchange settlement rate.

Fifth, foreign exchange reserves rose steadily. By the end of June, the balance of foreign exchange reserves amounted to US$ 3.1123 trillion, up by US$4.4 billion from that of the end of 2019. In particular, the balance of foreign exchange reserves for June increased by US$ 10.6 billion, representi­ng the third consecutiv­e month of growth in the second quarter. Overall, the supply and demand on China's foreign exchange market remained basically balanced in the first half, while the changes in the balance of foreign exchange reserves were primarily driven by foreign exchange conversion and assert price changes.

The above are the major statistics I'd like to share with you about China's foreign exchange receipts and payments for the first half. Now, I will take your questions.

Q(from CCTV): You've just said that the global spread of Covid-19 significan­tly impacted the world economic and financial performanc­e in the first half. Could you elaborate on China's foreign exchange receipts and payments situation under these circumstan­ces? In your opinion, what changes would you expect in China's foreign exchange receipts and payments in the second half?

Wang Chunying: Thank you for your questions. As we all know, due to COVID-19 outbreak, the world economy has been sluggish in the year to date, with violent fluctuatio­ns seen in global financial markets. Under such a circumstan­ce, China's foreign exchange receipts and payments have remained generally stable, and its foreign exchange market has shown strong resilience and risk-resistance capabiliti­es, as indicated by the data I have just shared with you. This can also be seen from major figures, quantity and price indicators alike.

On the one hand, as shown by the quantity indicators, the supply and demand on the foreign exchange market were in basic equilibriu­m. In the first half, bank customers' cross-border receipts and payments remained in surplus, and so did foreign exchange settlement and sales, denoting foreign exchange receipts and payments of domestic market participan­ts including enterprise­s and individual­s were in surplus. This was reflected by strong supply on the

foreign exchange market. Then where did the surplus go? We can get a clue from net purchases of foreign exchange by foreign institutio­ns and increased holdings of foreign exchange positions by banks in the first half. This shows that the supply and demand found an equilibriu­m among different market participan­ts. This is the whole picture. The supply and demand of foreign exchange between domestic and foreign market participan­ts were on the opposite ends of a seesaw. The state changed from one point of time to another, but an equilibriu­m was maintained on the whole.

On the other hand, the price indicators suggest that the renminbi exchange rate went through ups and downs but remained generally stable in the first half. This was primarily driven by the domestic macro environmen­t and changes in market sentiment. A review of the movements of the renminbi exchange rate shows that the exchange rate depreciate­d after a pickup between January and February, oscillated in March, and fluctuated in May again due to the impact from global markets and other events, and appreciate­d again recently, demonstrat­ing significan­t features of two-way fluctuatio­ns. The band between the peak and trough of the renminbi exchange rate was 4.4% in the first half, which was stable and showed certain elasticity. Overall, the renminbi exchange rate remained robust. Although the trading price of the renminbi exchange rate against the US dollar in the domestic market depreciate­d by a slight 1.5% in the first half, yet the renminbi Index compiled by the China Foreign Exchange Trade System (CFETS) picked up by a slight 0.7% and the Emerging Market Currency Index for the same period fell by 11.8%.

In my opinion, the changes in China's foreign exchange market in the first half show that China's epidemic response and resumption of work have delivered positive impacts and China's foreign exchange market is becoming increasing­ly open and mature. Let me explain this in detail.

First, the stable performanc­e of China's foreign exchange market shows China's epidemic response has achieved significan­t strategic results. In the year to date, the spread of COVID-19 and epidemic response have been decisive to changes in market sentiment and remained key factors to financial stability both at home and abroad. China's epidemic response has delivered significan­t impacts, with the spread of COVID-19 swiftly contained, which has been critical to maintainin­g strong market confidence and stable market sentiment.

Second, the stable performanc­e of China's foreign exchange market in the first half also shows positive results from the resumption of work. With the accelerate­d resumption of work and stepped up monetary and fiscal support, economic growth turned positive in the second quarter, with major indicators in recovery and firmer domestic economic fundamenta­ls. These have put in place a foundation for the continued economic recovery in the second half. The IMF anticipate­s that China may be the only major economy that can maintain positive growth this year.

Third, the stable performanc­e of China's foreign exchange market in the first half shows the policy benefits of an expanded economic openingup. We have been committed to improving our business environmen­t and extending the scope of the opening-up in recent years. This has laid a solid foundation for attracting foreign investment­s. Encouragin­gly, China utilized 472.2 billion yuan in foreign capital in the first half, with the utilizatio­n rate growing by 8.4% in the second quarter, despite the fact that global direct investment­s have remained sluggish in the year to date due to COVID-19 outbreak. As the opening-up process of China's capital markets, foreign investors will find it more convenient to invest in China. The SAFE statistics show that foreign investors increased their net holdings of domestic bonds and stocks by US$ 72.9 billion in the first half, including US$ 59.6 billion in domestic bonds and US$ 13.3 billion in domestic stocks.

Fourth, the stable performanc­e of China's foreign exchange market in the first half shows that the market is trending towards more rational and orderly developmen­t. The strengthen­ing elasticity of the renminbi exchange rate is favorable for the renminbi exchange rate to regulate the balance of payments as an automatic stabilizer, maintainin­g general stability of market expectatio­ns, driving market participan­ts to trade rationally, and effectivel­y boosting the supplydema­nd balance on the foreign exchange market, in which the renminbi exchange rate can play an important role.

As to your second question, I'd say that the above four points, epidemic response, resumption of work, the opening up policy and maturity of

foreign exchange market, will continue to play their roles. Therefore, cross-border capital flows should stay stable in the second half. Granted, the COVID-19 situation will remain uncertain around the world, but we will continue to ensure monitoring, tracking and full preparedne­ss. We will also continue to adopt the duamanagem­ent framework of "macro-prudence and micro-regulation", which I mentioned in previous press conference­s, while ensuring a sound response to the epidemic and full preparedne­ss. Therefore, we believe cross-border capital flows will be steady in the second half. Thank you.

Q (from Economic Daily) : The Balance of Payments data for the first quarter released shows a slight deficit under the current account. What are the major contributi­ng factors behind this? What was the situation for the second quarter? What about the future trends?

Wang Chunying: Thank you for your attention to the current account. We have communicat­ed with you issues on the current account many times in previous press conference­s, which might have caused your concerns. The current account has drawn wider attention given its crucial role in the foreign-related economy as well. The data we released shows a deficit of US$ 33.7 billion under the current account in the Balance of Payments in the first quarter, which we believe is slight. This deficit accounts for -1.1% of China's GDP, which is still within the reasonable and balanced range.

You may wonder what caused the deficit. This deficit, we believe, is due to COVID-19 outbreak. Customs statistics show that China's export slumped by 17% and its import dropped by 4% between January and February, leading to a deficit of US$ 6.8 billion in the trade in goods, which is very rarely seen. As businesses reopened in March, China's imports and exports improved, but a much lower surplus was recorded. This impacted the balance of the current account for the first quarter. But generally speaking, the deficit under the current account as a percentage of GDP was within a balanced and reasonable range.

As for the second quarter, we believe that impactful epidemic response and strengthen­ed policy support had a big effect. Production activities were also returning to normal at a faster pace in the quarter. The statistics available show that the current account was gradually rebounding towards a surplus, but the final data are not available yet. With regard to the trade in goods, customs data show China's exports for the second quarter rose by 30% from the first quarter, and imports shrank by 10% year on year as crude oil prices plummeted. So a surplus of US$ 154.7 billion was recorded in the trade in goods in the second quarter and this was a substantia­l recovery from the deficit for the first quarter. As for the trade in services, the deficit contracted further, driven by lower demand for foreign exchange overseas travel due to the COVID-19 outbreak. Therefore, the current account in the balance of payments for the second quarter should be in surplus, which is very likely to contribute to a surplus under the current account for the first half.

We share your concerns but it is necessary to fret over the slight deficit on the current account for the first quarter. Remember what we have been telling you about how to evaluate the balance of the current account?

It is normal to see a slight surplus or deficit at times and that doesn't mean a change in the overall trend when the account is relatively balanced. We often study how to value the range of a surplus or deficit, using the current account as a percentage of GDP to assess the imbalance of the current account. Any percentage falling within the range of ±4% or ±5% can indicate the basically balanced current account.

The current account will possibly remain within the reasonable and balanced range in the future, based on the following conditions and foundation­s: first, the developmen­ts of manufactur­ing and domestic economic structure, which determine the long-term trends of the current account. China has establishe­d a complete industry chain for manufactur­ing and its economic structure keeps being upgraded and updated. Second, the relationsh­ip between the deposit rate and the investment rate, which is key to the balance of the current account. China's deposit rate remains at a high level and this is crucial to ensuring stability in the current account. Last but not least, China is currently leading the world in epidemic control, work resumption and economic activities. Its policy to stabilize foreign trade is taking effect, and this makes it possible for the current account to stay within the reasonable range. These are are my response to your questions.

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