REPEAT: 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