China’s overseas investment regulations will prevent risks from harming economy

By Hu Weijia Source:Global Times Published: 2017/3/22 0:08:39

China needs to minimize financial risks as its companies seek to invest overseas with standardized management and ramp up efforts to improve investment efficiency and prevent massive capital outflow.

China's first regulation on overseas investment is likely to be introduced this year, in which the government will identify outbound investment behaviors that it will encourage and ban, the Economic Information Daily reported Tuesday. Tighter controls on outbound direct investment (ODI) will help rein in irrational investment and prevent corrupt Chinese officials from transferring assets overseas.

China in recent years has witnessed an unprecedented boom in ODI. Official data showed that Chinese firms invested about 1.1 trillion yuan ($170 billion) overseas in 2016, a 44.1 percent year-on-year increase. China may need to place tighter controls on some domestic enterprises and set constraints to avoid overheating in the country's outbound investment.

In the latter half of the 1980s, Japan saw a sharp increase in overseas investments, and its economy was subsequently dragged down by the inefficient investments. Some voices suggest that China's current situation looks similar to Japan's in the 1980s. However, China still has time to keep its economy from falling into a lost decade.

As Chinese ODI increases, the rate of returns on their global portfolios has been disappointing, requiring the necessity to monitor irrational investment in certain areas such as real estate and sports clubs. The golden era of China's real estate industry seems to have ended, and as such some investors began to turn their eyes to foreign markets. But excessive speculation will just disrupt real estate markets in other countries, and could also mean large economic losses for Chinese investors.

Additionally, some Chinese are emigrating and moving their assets overseas through certain ODI channels, accelerating China's capital outflows. The government needs to prevent corrupt officials from fleeing overseas as well as strictly enforce existing control policies, such as the $50,000 yearly exchange limit for Chinese citizens.

As China faces increasing pressure on capital outflow, the government is likely to monitor overseas investment for illegal acts of transferring assets abroad or engaging in blind overseas investment. However, the world should not read too much into the move. China is expected to continue to encourage outbound investment, especially those conforming to the direction of the  Belt and Road initiative. The government will strive to create a situation where tightened controls on Chinese firms seeking to invest overseas does not impact their normal business operations.

The author is a reporter with the Global Times.


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