Improved Regulatory Environment the Cure for Excess Capital Outflows: Yu Yongding


One of China’s leading economists says inadequacies in the regulatory environment will continue to spur capital outflows by incentivising domestic companies to pursue profits abroad, despite the recent first half plunge in overseas investment.

Official data indicates that China’s outbound non-financial foreign investment for the first half plunged 45.8% year-on-year to USD$48.19 billion, on the back of improving domestic confidence, a stabilising Chinese yuan and strong regulatory controls.

This precipitous decline in outbound foreign investment prompted many observers to forecast a loosening of foreign investment policies, particularly following remarks by Yang Pengcheng, chairman and spokesman for the policy research office of the National Development and Reform Committee, at a related press conference.

Sun Lujun, director of sovereign wealth fund CNIC Corporation and former capital project manager with the State Administration of Foreign Exchange, said earlier this month that abrupt reverse to capital controls have been par for the course for China since the Asian Financial Crisis last century.

“Around 2005, we were mainly preventing capital outflows, but subsequently saw a shift towards capital inflows. Since 2015, we have again focused on the prevention of capital outflows, so overall policy has continuous flipped.”

Yu Yongding, former president of the China Society of World Economics and a member of the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006, said to Caixin that regulators should continue to implement firm capital controls overall, which should adjusted depending upon the extent of exchange rate fluctuations.

According to Yu fluctuations in exchange rates will provide de facto adjustments to overseas investment and capital outflows.

Inadequacies in the policy environment prompt overseas expansion by Chinese companies

Yu further notes that a key source of outbound foreign investment is overseas acquisitions by Chinese companies. In Yu’s opinion, however, many such acquisitions are not instances of normal market behaviour, but are instead motivated by a domestic regulatory environment that incentivises domestic companies to pursue profits abroad.

For this reason, the Chinese government should strengthen property rights as well as reforms of the domestic tax and pricing systems, “otherwise, companies will always want to run off,” irrespective of exchange rate levels.

Yu also called for greater consistency in capital control and overseas investment policies, pointing out that while the National Development and Reform Commission encouraged companies in the real-estate and other sectors to issue bonds abroad in the second half of last year, other departments have since called for restraint due to concerns over systemic risk.

Chinese companies companies should not be encouraged to issue bonds abroad

Yu said that Chinese companies should not be encouraged to issue bonds overseas given that one of the country’s biggest advantages at present is its negligible levels of foreign debt, which means that policymakers need not fret too much about depreciation of the Chinese yuan.

In addition to continuing to the maintenance of significant capital controls, a key reason for China’s low level of foreign debt is that Chinese companies have not issued a copious volume bonds in overseas jurisdictions.

Yu points out that if the scale of foreign bond issuance increases, any marked depreciation of the Chinese yuan could caused indebted companies to collapse.

He further notes that there is no need for Chinese companies to seek funds abroad given that China is a high-savings nation with ample idle funds, as well as a net explorer that should be exporting capital, as opposed to importing it.

With respect to want of use of domestic capita, Yu said that recent pressure on the Chinese yuan had encouraged capital outflows, while monetary policy implemented as part of an ongoing deleveraging campaign had made it difficult for sum companies to borrow funds.