China takes steps to relax capital controls in top cities to woo foreign investors

HONG KONG – China is taking steps to loosen strict capital control measures in its two most important cities, amid efforts to win back foreign companies as overseas investment slumps and the economy slows.

In Shanghai’s pilot free-trade zone and Lingang area, foreign investors are now allowed to freely transfer their investment-related funds in or out of China without any delay should the money be “real and compliant”, the authorities in the financial hub said in a set of rules that took effect on Sept 1. 

Expatriates of foreign companies based in those areas, including staff from Hong Kong, Macau or Taiwan, can freely move their wages and other legal incomes out of the country according to the law.

The currency type, amount or frequency of the remittances will not be restricted by an organisation or individuals, they added. 

Beijing has also proposed similar regulations for the whole city, according to drafted rules published on Wednesday that it is now seeking public feedback on.

Meanwhile, the Chinese capital city is exploring exempting overseas firms from foreign-exchange registration for their reinvestments.

The local government said the proposed rules are aimed at facilitating and encouraging foreign business investments.

The relaxation of non-Chinese companies’ money flows comes as President Xi Jinping’s government is ramping up measures to reverse the nation’s foreign investment slump.

The State Council, China’s Cabinet, issued a 24-point plan in August to court overseas firms with pledges to offer them better tax treatment and make it easier for their workers to obtain visas. 

Western companies in China are now the gloomiest they have been about the future in decades, largely due to geopolitical risks, according to a recent survey by the American Chamber of Commerce in Shanghai.

Persistent tensions with the West – coupled with China’s economic slowdown – have sparked a US$188 billion (S$257 billion) exodus from Chinese stocks and bonds from a December 2021 peak to the end of June 2023, diminishing the market’s clout in global portfolios. 

“Faced with the general trend of foreign investors diversifying away from China, Beijing has every reason to slow down this pace as best as it can, especially given the current challenging economic situations,” said Mr Neo Wang, Evercore ISI’s New York-based managing director for China research.

“These look like coordinated moves addressing an important topic that was omitted” from the 24-point August guidance, he added.

At the same time, what is at stake is

China’s flight of capital that is already the biggest in years,

creating concern for the authorities as it worsens pressure on the beleaguered renminbi. 

The currency has been hammered from all fronts as money leaves its financial markets, global companies look for China alternatives and a revival in overseas travel hits services trade.

All of this is captured in the latest official data, which shows an outflow of US$49 billion in the capital account in August, the largest since December 2015. 

The exodus, spurred by sputtering growth in the world’s second-largest economy and a widening interest-rate gap with the United States, helped push the renminbi to a 16-year low.

The risk is that accelerated money outflows weigh more on the currency, sapping the market’s appeal and in turn resulting in further capital flight that can destabilise financial markets. BLOOMBERG