In the first half of 2017, non-financial outbound direct investment reached $48.2 billion, down by 45.8 percent compared with the same period of 2016. However, Chinese companies' outbound investment seems to have entered a fast track since 2008, and the scale hit a record of $170.1 billion in 2016. Meanwhile, China's foreign exchange reserves plummeted from $3.993 trillion to $2.998 trillion from June 2014 to January 2017. The People's Bank of China, the central bank, said a big reason for the sharply shrinking foreign exchange reserve is that it has to use a lot of money to stabilize the yuan's exchange rate.
Burgeoning outbound investments have led to huge capital outflows, destabilizing the exchange rate of the yuan and also China's domestic finance. However, to spend such a large amount of foreign exchange reserves to stabilize the exchange rate within such a short period of time has rarely been seen, even in world economic history. Rapid and continuous capital outflows will easily result in an imbalance of China's intentional payments. China's financial regulator has begun to tighten its grip against this background. The Ministry of Commerce recently again issued warning against outbound investment in the areas of real estate, hotels, universal studios, entertainment and sports clubs. Regulators are worried that a lot of companies are moving their capital out of China in the name of overseas investment. Most companies that make outbound investments are heavily indebted back at home. Thus the key of financial regulation is capital outflow.
Given the tighter grips on financial regulation, many people worry that the Chinese Government will reverse its policy of encouraging enterprises to go out. The Ministry of Commerce and the National Development and Reform Commission have expressed that China still supports capable and qualified Chinese enterprises to go out and conduct real outbound investments in accordance with commercial and business laws and regulations. Particularly, enterprises are supported to invest in programs of the Belt and Road Initiative and international capacity cooperation.
(This is an edited excerpt of an article published in China Newsweek on August 7)
