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Opinion
Massive Capital Flow Unlikely
By Lan Xinzhen | NO. 33 AUGUST 16,2018
Is the ongoing China-U.S. trade war deterring foreign investors from investing in China? This is a question of concern for economists both at home and abroad. Statistics from the State Administration of Foreign Exchange released on July 19 showed that the trade war has not hampered international investing in China, conversely willingness to invest in the country has increased.

According to the statistics, Chinese lenders registered net forex purchases of $13.8 billion in the first half of the year, reversing a net sale of $93.8 billion for the same period last year.

This shows international investors' confidence in the development opportunities brought about by China's continuously expanding opening up.

Such confidence is also reflected by the foreign direct investment (FDI) statistics published by the Ministry of Commerce (MOC). According to the MOC, the number of new overseas-funded companies established in the first half of the year surged 96.6 percent from a year earlier to 29,591. FDI inflow grew 4.1 percent to $68.32 billion in the first half of the year. The number of new overseas-funded enterprises established in June alone increased 92.3 percent to 5,565. The figures show that foreign investors' willingness to invest in China was not affected by the trade war.

In addition, foreign investment in China was not affected by a rising dollar exchange rate caused by the U.S. Federal Reserve's move to increase the interest rate.

Since the second quarter, the dollar exchange rate has reversed the previous downward trend and has kept increasing. As a consequence, many emerging economies were thwarted as a large amount of capital flowed back to the United States in a bid to avoid risks.

As the U.S. dollar gets stronger, the renminbi exchange rate is decreasing. However, the possible foreign exchange loss caused by the lower exchange rate didn't forestall foreign investors from investing in China.

What is the main draw of the domestic market for foreign investors? The stable domestic economy has bolstered foreign investors' confidence. China's economy continued a strong growth momentum for the first half of the year, with the GDP expanding by 6.8 percent year on year. Moreover, the quality and efficiency of growth was improved as China pushed forward industrial transformation and upgrading through scientific innovation. Consumption also maintained a stable increase. Therefore, foreign investors are eying the potential profits generated by China's growth prospect.

The country's continuously widening opening up has also ignited foreign investors' hope. President Xi Jinping announced a series of new measures aimed at broadening China's opening up at the Boao Forum for Asia Annual Conference in April, including easing market access for foreign capital and lowering the threshold for foreign investors to establish financial institutions. The measures also included relaxed restrictions for the proportion of foreign capital in manufacturing industries and a more favorable investment environment for foreign capital. Xi vowed to align with international economic and trade rules, improve protection of intellectual property and expand imports. These measures have ensured more convenience for foreign capital to invest in China in a broader range of areas.

But will the effects of the China-U.S. trade war show in the second half of the year? It remains to be seen. Nevertheless, the Chinese economy has gained more resilience given that the country has transferred from investment-driven growth to growth powered by both investment and consumption, and from an export-oriented economy to one that puts an equal emphasis on exports and imports. The stable and healthy macroeconomic situation will enable foreign investors to achieve a steady increase in returns. Meanwhile, the controllable financial risks at large and adequate foreign exchange reserves will rule out the possibility of massive capital outflow.

In addition, China has rolled out even more attractive measures for expanding its opening up. For instance, China unveiled a shortened negative list for foreign investment in late June which reduced the number of restricted measures from 63 to 48. The country also launched a series of opening-up measures including improving the opening up of sectors such as finance, infrastructure, transportation, commerce, trade and logistics, and easing access to sectors such as agriculture, energy and resources. Moreover, the domestic capital market was opened up further by applying main international indexes to the stock and debt markets.

With these policies, foreign investors are set to embrace more opportunities for investment in China.

Copyedited by Rebeca Toledo 

Comments to lanxinzhen@bjreview.com  

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