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Free AccessREPEAT: MNI I'VIEW: Ex-Forex Official: China Re-Endorses ODI
Repeats Story Initially Transmitted at 09:45 GMT Jan 24/04:45 EST Jan 24
--China Capital Account Turns to Deficit as Controls Lift
--Credibility of PBOC's Forex Policy Adds Stability
--Diversification of Forex Reserves Continues
BEIJING (MNI) - China has been loosening its grip on outbound direct
investment (ODI) as a stronger yuan eased concerns over capital outflows, a
senior advisor to the Beijing government told MNI in an exclusive interview.
"We've seen ODI rise in the past two months, indicating that SAFE has
approved more overseas deals," said Guan Tao, former head of the Balance of
Payments department at the State Administration of Foreign Exchange(SAFE).
Last year, pressured by rapidly declining forex reserves, regulators
tightened rules on outward capital flows, including halting acquisition sprees
by high-profile companies like Dalian Wanda Group and HNA Group. ODI in
non-financial sectors fell for the first time on record, dropping 29.4% from
2016 to $120 billion. But more recent data point to a sharp rebound ODI, Guan
said.
Guan is now a research fellow with the China Finance 40 Forum, an advisory
body comprised of 40 influential economists, including former central bank
officials and advisers.
--ODI JUMPS
Outbound investment in December rose 49 percent from a year ago to US$12.53
billion, building on November's 34.9 percent y/y gain, compared with a drop of
29.47% y/y in October, official data show. In April, ODI fell by 70.8 percent
y/y, the biggest ever recorded drop, to $5.85 billion.
China imposed or applied a slew of regulations, many implicit or previously
unenforced, to curb capital outflows since the end of 2016. Currency regulators
scrutinized applications for overseas projects, while at the same time
encouraged inflows and sales of forex assets in exchange for yuan.
The People's Bank of China (PBOC) has been in a better position to manage
cross-border yuan transactions, aided by steady surpluses in the international
balance of payment, Guan said.
There was also some speculation that SAFE rigorously reviewed ODI
applications over $5 million. Guan said he would "assume" those restrictions had
been lifted too.
Ensuring the balance of payments is a must for the PBOC to stay out of the
market, Guan said. A surplus in the current account would normally be matched
with a deficit in the capital account, so the current situation of having
surpluses in both accounts, is abnormal and cannot be sustained, therefore, a
relaxation over ODI is one way to the restore balance, he said.
--DIVERSIFY FOREX RESERVES
Guan also addressed the speculation over China's adjustment of its $3.14
trillion forex stockpiles to include more non-dollar assets.
China has publicly stated that it is diversifying the makeup of its forex
stockpiles. That, a senior PBOC source told MNI early this month, is an
admission that China is cutting back on U.S. Treasury purchases.
"Diversifying the forex has been in process for years and will continue,
because it is necessary to manage the forex assets," the former SAFE insider
said.
Stating it is "diversifying" doesn't necessarily mean China would sell its
holdings of U.S treasuries, but it gives China a bargaining chip when dealing
with a host of issues with the U.S., Guan said.
It serves as a reminder to the U.S government to be "responsible" when
dealing with China on bilateral issues, Guan said.
--MORE CREDIBLE POLICIES
As the yuan steadily gains, China's policymakers have grown more confident
and resolute in moving towards a market-based forex management approach,
gradually step back from the market intervention.
"The appreciation of the yuan has effectively defeated those who shorted
the yuan and established a credibility in its exchange-rate management
policies," Guan said. Since the goal of China's forex policy is to keep the
currency's stability at a reasonable range, winning the market's confidence is
the key, he said.
Successfully managing the forex allows regulators to reduce excess or
abnormal volatilities, and being at a reasonable equilibrium allows greater
volatilities, Guan said.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.