June 09,2009

China Encourages Use of Forex Reserves for Overseas Investment to Help Exports

By CSC staff, Shanghai

China is looking to stimulate its steadily declining exports by promoting overseas investment, and for the first time is encouraging private enterprises and companies investing overseas to make use of its forex reserve.

The State Administration of Foreign Exchange (SAFE) has said that from August 1, domestic enterprises will get funding support for their overseas sectors in a more convenient way when they launch overseas business.

Overseas investment by Chinese firms is growing rapidly, but such enterprises have long suffered financing difficulties and lack of circulating capital. In the present financial turmoil, liquidity pressure on overseas financial institutions has worsened the overseas financing environment. The State Council is now requiring relevant departments to support overseas investing enterprises of all types to stimulate exports.

According to previous regulations, only enterprises with investment in at least three overseas companies were eligible for overseas fund remittance, and the total investment could be no less than $5 million. As a result, only big companies with sufficient funding were eligible. The new policy loosens limits on total investment and the number of overseas companies domestic enterprises must invest in, so private companies will also benefit.

Also previously, overseas fund remittance could only be in a company's own foreign exchange, while according to the new policy, such fund remittance can also use foreign exchange bought with RMB and funds from the forex reserve pool approved by SAFE.

There are, however, still limits. The balance of a company's overseas fund remittance should be no more than 30% of its overseas equity, and should be no more than the contract investment amount that has been approved.
 
From now, a domestic enterprise can provide funds to overseas sectors in three forms. First, it can directly provide funds to wholly owned overseas subsidiaries or companies it has a stake in.  Second, it can provide funds in the form of entrusted loan from a designated bank. And, if a domestic group company includes a financial company eligible for foreign exchange business, it can also transfer funds by entrusted loan of the financial company.

SAFE says the new policy helps to relieve the funding problem of enterprises with direct overseas investment and will therefore stimulate export growth.

Before releasing the new policy, SAFE conducted pressure tests on the possible influence and fund outflow due to the policy. The result showed the upper limit the overseas fund remittance to be about $30 billion. As this is a tiny drop in the ocean that is China's total forex reserve, its effect on China's balance of international payment and the overall risk will be negligible.
 
Special accounts will be set up for the capital outflow and inflow under this policy and these funds can only be transferred to other accounts with banks?approval.

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