As just yesterday I talked about the new initiative by the Chinese legislator to simplify the rules (
http://blawg.lehmanlaw.com/wordpress/?p=1821
) for the realization of Foreign Direct Investments (FDI), today I would like to spend a few words about the impact of the appreciation of the yuan (also known as RMB) on FDI.
First, let me begging giving you some data:
China has been the developing world’s largest recipient of inflow FDI since the mid-1990s, attracting US$95 billion in 2009 (for more info please visit the following web-site:
http://stats.unctad.org
)
The most notable and immediate effect of the appreciation of the local currency (i.e. yuan or RMB) is that this situation will make a new foreign investment more expensive for foreign firms to establish themselves (or expand their presence) in China (which remain the world’s most dynamic market), giving an advantage to foreign firms already established there over new entrants.
At the same time, for Chinese companies to export abroad it will become less competitive, although the increased costs will be partly offset by lower costs of imported goods. Another side effect is that foreign companies doing business here expect to repatriate higher profits from sales in China in terms of their own currencies.
This situation also is allowing Chinese companies interested in investing abroad and acquiring foreign entities to conquer a larger portion of international markets at a discounted price. In fact the so called “going out policy” or “go global policy” is favored by the appreciation of the local currency because the purchasing power of the RMB has increased substantially. Thanks to this particular situation China’s Outbound FDI have continued to grow in these years, in line with the latest Five Year Plan, which came into effect in 2011, in which it is underlined the commitment to promote the “going global” policy.
Naturally a renewed yuan appreciation would boost China’s OFDI growth even further by lowering the cost of overseas assets for Chinese firms, which have strong cash reserves from both retained earnings and large-scale state credit allocations that put them in a position to invest internationally. Like competitors elsewhere, they need to invest abroad to acquire a portfolio of locational assets to protect and increase their international competitiveness through better access to skills, technology, natural resources, and markets. China, moreover, is using outbound FDI as a key mechanism for integrating itself into the world economy and making it a prominent stakeholder in it and gaining at the same time more influence at international level.
However, all this has an impact also on the daily fixing of the RMB against other foreign currencies. (
http://usa.chinadaily.com.cn/business/2013-05/09/content_16486402.htm
).
For example just to give you an idea of the “performance” of the yuan recently, the People’s Bank of China on Wednesday May 8, 2013 set the daily reference rate of the yuan against the dollar at 6.1980, the highest in 19 years since China unified the official and market exchange rates at the end of 1993. Later, the yuan closed at 6.1410 against the dollar in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.1396 earlier, the strongest level since the end of 1993. The daily fixing of the yuan rose 1.41 percent since the beginning of the year against the dollar, as indicators show that capital flows into the world’s second-largest economy accelerated in recent months. The yuan is allowed to trade within 1 percent in each direction around the daily reference rate.
“Appreciation expectations and onshore demand for the currency still dominate the market as capital inflows continue, and the authorities are working to make the pricing of the yuan more flexible and market-oriented,” said Guo Tianyong, a professor at the Central University of Finance and Economics in Beijing.
The State Council, China’s cabinet, said this week it will draft an operational plan to achieve full convertibility of the yuan and establish a comprehensive system for individuals’ outbound investments. The central bank data showed that banks brought in nearly 236.3 billion yuan ($38.25 billion) worth of foreign exchange in March on a net basis, boosting the total yuan holdings for purchasing foreign currency to nearly 27.1 trillion yuan. Apart from international “hot money” inflows, the rising willingness of Chinese companies, especially property developers, to sell dollar-denominated bonds in overseas markets also contributed to increasing cross-border money inflows, said Ding Zhijie, dean of the School of Banking and Finance at the University of International Business and Economics in Beijing.
Expectations of the yuan’s appreciation have also strengthened as China’s band-widening discussions have been rekindled following recent comments from PBOC officials indicating that the yuan trading band will be further widened “in the near future”.
No doubts that the yuan is going to be accepted internationally but before to achieve a full convertibility the Chinese government has still to implement a detailed “operational plan” as stressed in my previous entry.
Cristiano Rizzi