The unofficial restrictions China placed on multinational corporations last year sending capital out of the country via pooling structures just got more restrictive. It’s unclear whether renewed strength in the RMB will alter China’s course.
Similar to the initial restrictions verbalized to global banks in January, the latest developments have not been issued officially, creating uncertainty among MNCs and their banks. As a result, sources are wary about commenting about the developments on the record. Nevertheless, word began circulating in November that companies seeking to transfer funds outside of China that exceed $5 million, whether in US dollars (USD) or some other currency, must seek approval from China’s State Administration of Foreign Exchange (SAFE).
That’s a massive reduction from the $50 million limit that was verbally related to banks in January by the People’s Bank of China (PBOC). The approvals also apply to domestic Chinese companies looking to invest overseas.
The restrictions reportedly loosened somewhat over the summer, but a renewed clampdown arrived in the third quarter amid a weak RMB.
Jackit Wong, an economist at credit insurer Coface, noted that that outbound direct investment between January and November 2016 jumped 55.3% year over year, to $161.7 billion. Meanwhile, Chinese household foreign-exchange deposits jumped 35.4% from January through October, to $113.1 billion, and the tourism-balance deficit rose 21.4% in the first three quarters, Ms. Wong said.
The China-based CFO of a Global 500 company confirmed the requirement for case-by-case approval by SAFE of capital outflows exceeding $5 million and noted that banks are abiding by the restrictions with their customers.
“The PBOC/SAFE monitors not only banks; it may also select large enterprises to discuss [outflows],” the CFO said, adding that today “it is difficult to use cash pooling structures to transfer money.”
The executive said the PBOC has given no indication when the restriction will end, adding it is likely it will last until the RMB’s return to higher, stable levels. He noted that inspections regarding capital outflows have increased, and the focus has spread beyond banks to corporate enterprises as well.
Much has been written about not only wealthy but also middle-class Chinese citizens investing their money outside of China, and the PBOC appears to be applying particularly burdensome restrictions on those capital outflows. The CFO said that investment funds injecting funds into projects outside of China must submit written form agreements from each individual investor.
Such measures are designed to inhibit the outflow of capital. In the case of corporates, because neither the January restrictions nor November’s more elevated version have been officially issued, it creates uncomfortable uncertainty for corporates and a quandary regarding how to extricate earnings from China.
“Nobody knows for sure whether the limit is $5 million or actually lower, just that companies need to get approval,” said one source monitoring the situation.
So the bank of a company that needs to move $20 million outside of China will likely tell the company it must seek approval, but because getting approval from SAFE will be uncertain, the company may chose to transfer the funds in increments of $5 million or less and hope it doesn’t get caught. The source emphasized that the uncertainty also applies to MNCs as well as domestic companies, and that MNCs may receive approvals more easily for transfers, although that too is uncertain.
Besides restricting capital outflows, the Chinese government has sought to draw capital into China. Most recently, the PBOC’s Shanghai branch announced a two-part initiative to encourage cross-border net capital inflow via the Shanghai free trade zone (FTZ). For one, it will allow private equity funds and equity-investment project companies to raise capital both in the FTZ and overseas to meet demand for cross-border investments. And two, it will allow MNCs to set up onshore cross-border RMB capital pools using Shanghai FTZ accounts to manage RMB holdings globally, Ms. Wong said.
“Attracting capital inflow to China would depend on the investment appetite of foreign investors,” Ms. Wong said, noting that so far this year such interest has been anemic.
Foreign direct investment growth—capital utilized in USD terms—increased only 0.2% through October, compared to annual growth of 5.5% in 2015 and 3.7% in 2014. However, Ms. Wong said, some sectors did see significant growth, often those supported by Chinese authorities. Those included medical and pharmaceutical manufacturing (up 86.6%), transport and storage (up 73.2%) and information, transmission, computer services (up 65.7%).
Other ways of raising foreign capital to use in China have also waned. Ms. Wong noted that the volume of “dim sum” bonds, issued overseas in RMB to avoid foreign-exchange risk dropped to RMB301.9 billion as of December 14, the lowest level since 2012. That, she said, is probably due to investor wariness of a downward trending RMB, driving up yields and hence issuers’ borrowing costs.
An alternative way to raise capital has been to get loans in offshore RMB, but that has become overly expensive.
“Thus getting loans in USD have become increasingly popular, even as interest rates have increased,” Ms. Wong said. “It’s worth noting that these USD loans are less likely to repatriate to China, unless Chinese enterprises need a capital injection.”