In August, the amount of capital invested by overseas investors tumbled to a record quarterly low amid a notable drop in business confidence. As a result, the governments in Beijing and Shanghai have proposed to relax capital rules, which would allow foreign companies and individuals to move money in and out of the country without restrictions. 

China’s Government Steps in As Investors’ Confidence Fades

Chinese authorities alleviated capital rules for foreigners, allowing individual investors and companies in Shanghai and Beijing to move their money freely in and out of the country. 

The move comes as part of China’s plan to attract overseas investors weeks after official data revealed that foreign direct investment (FDI) tumbled to a record quarterly low due to waning business confidence. According to disclosed data, direct investments by international investors totaled $4.9 billion in Q2, marking an 87% drop year-over-year and the worst slump since 1998 – when comparable data first became available. 

The sharp decrease as investors and businesses cooled down on China amid the ongoing property market crisis, which then weighed on the country’s stocks. 

To offset the decline, China allowed foreign investors at the Shanghai pilot free trade zone to remit their funds with no restrictions or delay. The statement by the Shanghai government said the funds must be “real and [legally] compliant” and related to their investments in China. The new rules do not apply to mainland China residents. 

Original Capital Controls for Foreign Investments in China

On the same day, the government of Beijing proposed similar rule relaxations to facilitate cross-border fund flows for overseas businesses. 

The moves by Shanghai and Beijing authorities represent a significant shift given that China typically maintains a “closed” capital account – meaning companies and individual investors cannot transfer funds in and out of the nation except in line with stringent rules. 

According to the original State Administration of Foreign Exchange (SAFE) regulations, foreign-invested enterprises (FIEs) may find that repatriating capital or profits out of China can include heightened layers of scrutiny from the government. Because the amount of outbound direct investment (ODI) hit record levels recently, China introduced strict capital controls at the end of 2016.

The scrutiny of ODI varies based on the amount of capital being transferred, the target industry, the receiving nation, and the investor. 

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