China's foreign exchange authorities announced a long-expected
loosening measure yesterday, allowing multinational companies to
transfer forex funds among its subsidiaries.
The new regulation, promulgated by the State Administration of
Foreign Exchange (SAFE), allows subsidiaries of Chinese and foreign
multinationals to borrow forex funds from their peers, both within
China and across the border, but stops short of permitting their
overseas subsidiaries to lend to member companies operating in
China.
The regulation takes effect next Monday.
The move "will provide a variety of solutions for multinational
companies to improve efficiency in the use of foreign exchange and
reduce financing costs, will help improve China's foreign
investment environment and propel Chinese-funded multinational
companies to implement their 'Go-out' strategy," the commission
said in a statement.
China still maintains strict forex controls. Its currency, or
renminbi, is only partly convertible under the capital account.
Companies, even those owned by the same parent group, were
previously not allowed to borrow forex funds from one
another.
Yet many foreign-invested companies operating in China have
accumulated sizable profits and excess funds from the local market,
and have been calling for integrated use of their forex funds, SAFE
said.
Many Chinese multinational firms are experiencing funding
shortages in overseas markets, which hamper their efforts to grow
internationally, the commission said.
"They were very anxious. Previously, when one member company
finds a very good project but does not have the money, it simply
could not borrow from its peer companies," said a SAFE official who
declined to be named.
"When we conducted research one year ago, they had very strong
requests and everybody wanted to be the pilot," she added.
Motorola and HP were among the pilot foreign companies selected
by SAFE before the formal regulation was formulated.
Although SAFE said the move aims primarily to facilitate
operations of multinational companies, some analysts say it has
some macroeconomic significance in broadening the narrow use of
China's growing forex funds, which has been complicating the
nation's monetary policy operations and put upward pressure on the
renminbi exchange rate.
"This adds more channels for the use of domestic forex funds,"
said Wang Yuanhong, a senior analyst with the State Information
Center.
"It will help secure an appropriate growth rate for forex
deposits, reduce interest payments (of Chinese banks), provide
convenience for multinationals and help alleviate the pressure on
money supply," he added, noting that no borrowing from abroad is
allowed under the new regulation.
The unabated expectations for a revaluation of the renminbi,
which some of China's trading partners complain is undervalued, and
the interest rate differentials between domestic and overseas
markets, have been driving capital inflows in recent years.
The growing dollar inflow has complicated China's monetary
policy operations, as the central bank has to purchase excess
dollars to enforce a narrow range of the renminbi exchange rate,
subsequently increasing local money supply at a time of rapid
monetary growth.
SAFE said multinationals in the regulation refer to group
companies that own subsidiaries both in and outside China, and has
a China-based member company responsible for managing the group's
investments globally or for a region that includes China.
Financial institutions are excluded, it said.
The regulation also stipulates ceilings on overseas lending - 20
percent of shareholders' equity for members of Chinese
multinationals and the sum of unexpatriated allocated profits and
unallocated profits of foreign investors in the proceeding year for
members of foreign multinationals.
(China Daily October 28, 2004)