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China Risk – The Escalating Threat to Foreign Business

Date: Monday, March 20, 2017
Source: American Journal of Transportation

Whilst much attention has been focused on United States/China business risk and relations following the election of President Trump in the United States, other unrelated but more pressing threats to foreign business have arisen in the PRC.

Beijing’s ongoing and apparently escalating measures to contain capital outflows are already having a significant impact on foreign business operating in mainland China. Boards of directors and senior management need to take note immediately.

The crackdown has, from the mainland government’s perspective been successful and has, for now, staunched fund outflows with the result that China’s foreign exchange reserves rose by USD6.92 billion in February 2017, back above levels of USD3 trillion.

Tightening of Capital Controls

China’s government has temporarily resolved its “trilemma” of choosing between a loose monetary policy, a liberalizing capital account and a controlled exchange rate – by tightening capital controls. The government quietly shifted policy after a mid-2015 stock market collapse, a sudden 2% devaluation in the yuan, and subsequent capital flight, all of which stoked fears about economic stability.

This policy has taken shape over the last eighteen months. Amongst other shifts, the State Administration of Foreign Exchange (“SAFE”)’s approval of foreign exchange applications slowed in early 2016, and in November 2016 the People’s Bank of China limited overseas investments by state owned enterprises. China’s outbound investment in the first quarter of 2017 fell 74% on a year earlier.

At a lower level, the SAFE in September 2015 curtailed overseas cash withdrawals through China UnionPay, a payment system, and in October 2016 closed a loophole on investment-related insurance policies. Public security officials in China have shut down many underground banks, and in Macau police have curtailed the use of cross-border sales terminals.

The Threat to Foreign Business

For all its success in slowing capital outflows, though, Beijing’s policy poses threats to foreign businesses. One immediate problem is weakened demand from Chinese customers, affecting industries across Asia. The end of the China UnionPay exemption damaged Hong Kong’s insurance business (selling into the mainland), and a decline in Chinese money has softened property prices in Johore, Sydney and Vancouver.

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