China eases capital rules to shore up investment

In a pivotal shift towards relaxing stringent capital controls, China has opened its financial gates, allowing foreign individuals and companies in Shanghai and Beijing to freely move their money into and out of the country. This move by China underscores its determined efforts to court overseas investors and bolster its appeal as an attractive destination for foreign capital.

The announcement comes on the heels of official data revealing that foreign direct investment (FDI) in the country had plunged to a record quarterly low, primarily driven by a substantial decline in business confidence.

As of September 1, foreign investors, whether individuals or corporations, operating within the bustling Shanghai pilot free trade zone, a hub housing tens of thousands of companies, can remit their funds without encountering any restrictions or delays. The Shanghai city government, in a statement, stipulated that these funds must be “real and [legally] compliant” and should be linked to their investments in China. It is imperative to note that these regulations do not extend to mainland Chinese nationals.

Shanghai’s free trade zone, which boasts dimensions slightly larger than the city of Seattle, serves as the home to notable global entities, including Tesla’s Gigafactory and the country headquarters of multinational giants such as HP, AstraZeneca, and BlackRock.

Simultaneously, the Beijing city government, in a bid to facilitate cross-border fund movements for foreign businesses, has proposed similar regulations and is actively seeking public feedback on this proposal.

These policy shifts align with the Chinese government’s overarching strategy to attract foreign investment and foster an open economy. It’s essential to emphasise that China, to date, has maintained a “closed” capital account, imposing strict rules on the movement of funds for both corporations and individuals.

The Chinese currency, the renminbi (RMB), has experienced a depreciation of over 6% against the US dollar since the commencement of April. This depreciation is largely attributed to a deceleration in economic growth and more aggressive monetary policy easing by China’s central bank compared to its Western counterparts. A weakening currency can erode a country’s investment appeal and potentially expedite capital outflows.

Thursday’s measures represent the latest endeavour by China’s leadership under President Xi Jinping to entice foreign capital and foster stable relations with Western countries. The plunge in FDI during the second quarter, reaching levels not seen since records began in 1998, was a significant trigger for these actions.

Business confidence among American firms operating in China has notably dwindled. According to a survey by the American Chamber of Commerce in Shanghai, only 52% of respondents expressed optimism about their five-year business outlook, marking the lowest level since the survey’s inception in 1999. This starkly contrasts with the figures of 55% in 2022 and 78% in 2021.

Foreign companies and investors have become increasingly cautious due to mounting risks in China, encompassing an economic slowdown characterised by weak domestic demand and a housing crisis, Beijing’s prioritisation of national security over economic growth, and deteriorating relations between China and numerous Western nations.

China has, in recent times, implemented several measures aimed at stabilising foreign trade and investment, including the unprecedented move of cutting a tax on stock trading for the first time since 2008.

Furthermore, the People’s Bank of China engaged in discussions with top Western corporations, such as JP Morgan, Tesla, and HSBC, reaffirming its commitment to further opening up the financial sector and optimising the operating environment for overseas companies.

The relaxation of capital controls, the latest in a series of policy initiatives announced by Beijing and Shanghai, China’s two largest cities, is part of a broader strategy to promote foreign trade and investment. Expatriates working at foreign enterprises within the Shanghai free trade zone, including those from Hong Kong, Macao, and Taiwan, now have the ability to transfer their income abroad without facing any restrictions, in line with these rules.

Beijing’s policy mirrors these measures, additionally pledging to streamline the process for foreign firms to transfer data overseas through “fast-track” channels and actively encouraging investment in high-end manufacturing, services, and green industries within the city.