China's Bold Move: Opening Floodgates for Foreign Investment with Relaxed Capital Controls
China eases capital controls to attract much-needed foreign investment, allowing foreigners in Shanghai and Beijing to freely transfer funds in and out of the country This move reflects a significant step towards relaxing strict regulations and enticing overseas investors
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In a notable step towards loosening its stringent capital controls to attract foreign investors, China now permits individuals in Shanghai and Beijing to freely transfer their funds in and out of the country.
The announcement comes shortly after the release of official data that revealed a significant decline in foreign direct investment (FDI) in the country during the last quarter, primarily due to a decline in business confidence.
In a statement released by the city government on Thursday, it was confirmed that foreign investors, whether individuals or companies, operating within the Shanghai pilot free trade zone – home to tens of thousands of firms – are now able to remit their funds without encountering any restrictions or delays.
The funds must meet "real and [legal] compliance" requirements and be connected to their investments in China, according to the statement. These regulations, which do not apply to Chinese nationals residing on the mainland, came into effect on September 1.
Shanghai's free trade zone is among the largest in China and is slightly larger than Seattle.
The Gigafactory of Tesla is located here, along with the national headquarters of numerous multinational companies such as HP, AstraZeneca, and BlackRock.
Similarly, the Beijing city government also announced regulations on the same day, with a commitment to support international businesses in managing cross-border fund flows. The government is currently seeking public feedback on this proposal.
The government stated that the policies have the objective of enticing foreign investment to foster an open economy.
China upholds a capital account that is "closed," implying that companies and individuals have limited freedom in transferring funds into or out of the country, and are subject to stringent regulations.
China maintains tight controls over its capital account.
The Chinese currency has depreciated over 6% against the US dollar since April, due to a slowdown in economic growth and more aggressive easing of monetary policy by its central bank compared to Western counterparts. This depreciation may hinder the country's investment attractiveness and prompt a faster outflow of capital.
Thursday's measures represent the most recent attempt by the Chinese government, led by Xi Jinping, to attract foreign investment and maintain stable relationships with Western countries. Data released by the State Administration of Foreign Exchange last month revealed a significant decline in foreign direct investment (FDI) in China during the second quarter, reaching its lowest point since 1998, the start of recorded records.
Separate statistics released by the commerce ministry on Sunday revealed a decline of over 5% in the measure of FDI during the first eight months of 2023, in comparison to the same period the previous year.
People's Bank of China (PBOC) Vice Governor Pan Gongsheng speaks at a news conference in Beijing, China March 3, 2023.
Florence Lo/Reuters
China woos Tesla, JP Morgan and other Western companies as foreign investment slumps
Low confidence
Business confidence among American firms in China has significantly declined. According to a recent survey conducted by the American Chamber of Commerce in Shanghai, only 52% of respondents expressed optimism about their five-year business outlook. This marks the lowest level of confidence since the survey was initiated in 1999, a stark contrast to the 55% recorded in 2022 and the significantly higher figure of 78% in 2021.
Foreign companies and investors are increasingly concerned about the mounting risks in the world's second-largest economy. These risks include a sluggish domestic demand, a housing crisis, Beijing's focus on national security rather than economic growth, and deteriorating relationships between China and several Western nations.
To stabilize foreign trade and investment, China has implemented various measures, such as reducing the tax on stock trading for the first time since 2008.
On Monday, the People's Bank of China engaged in meetings with several prominent Western companies such as JP Morgan, Tesla, and HSBC. During these meetings, the bank made a commitment to enhance the openness of the financial industry and improve the operating environment for overseas companies.
These efforts to relax capital controls form part of a wider policy package introduced by Beijing and Shanghai, the two largest cities in the country. The aim of these measures is to create a more conducive environment for foreign trade and investment.
Employees working for foreign companies in the Shanghai free trade zone, including individuals from Hong Kong, Macao, and Taiwan, are allowed to transfer their earnings abroad without any limitations, as per the regulations. Beijing's policy includes comparable provisions, aiming to facilitate the transfer of data overseas for foreign firms through expedited channels. Furthermore, it incentivizes investments in the city's advanced manufacturing, service, and environmentally-friendly sectors.
