China Opens Further to Foreign Investment

EghtesadOnline: China will further open its economic borders to investors from abroad in a move intended to counter sliding confidence in the outlook for the world’s second-largest economy.

News ID: ۷۶۹۰۰۹

25 August 2016

The nation will continue opening its education, finance, culture and manufacturing sectors to foreign investors, the Vice Minister of Commerce Wang Shouwen said at a briefing in Beijing late Tuesday. Measures will focus on boosting investment in inland, western regions, Wang said, Bloomberg reported.

Foreign capital utilized by the country declined by 1.6% in July. While global investors fueled China’s economic boom by building factories, shops and infrastructure in the nation since 1978, some lucrative service sectors such as finance and telecommunications are largely closed to them.

China also is considering using a nationwide “negative list” to relax those regulations, which means only industries listed are closed to investors from overseas. The negative list is now applied only in free-trade zones, while other areas can limit all sectors that aren’t specifically cleared.

As foreign investment growth in China has slowed, the nation’s outbound investment has surged. Chinese investment overseas is mainly through mergers and acquisitions, Wang said.

Fiscal Management

The Chinese government is seeking to clarify the fiscal powers of central and local government as part of efforts to reform fiscal management and ensure efficient delivery of public services, Xinhua reported.

China will moderately increase the administrative obligations of the central government and reduce overlapping responsibilities between central and local government, according to a guideline issued by the State Council.

Spending responsibilities will be more accurately distributed depending on the nature of the public services, the State Council pledged.

It is also considering putting the supply of public services concerning regional economic development into the hands of upper levels, while giving some public services to the local level, reports Financial Tribune.

The guideline specified that pilot reforms will be carried out in national defense and foreign affairs in 2016, with the aim of achieving major breakthroughs in education, healthcare, environmental protection and public transportation between 2017 and 2018.

In 2019 to 2020, China plans to finish the reforms and revise relevant laws and regulations accordingly.

The move came as a lack of clarity in assigning responsibility to different levels of government has caused problems, such as widening regional disparities, increasing local government debt and inefficient delivery of public services.

Cash Injection

China’s central bank injected cash into money markets through 14-day reverse repo agreements for the first time since February in a sign policymakers were worried rising leverage could stoke bubbles in the bond market, Reuters reported.

Analysts say the switch to longer tenor, higher interest rate injections may signal the central bank is concerned that too much of short-term borrowing is flowing into the bond market. For most of 2016, the People’s Bank of China has effectively targeted the lower interest seven-day rate, with cash injections nearly every day.

The PBOC on Wednesday injected 90 billion yuan ($13.55 billion) into money markets through seven-day reverse bond repurchase agreements (repos) and an additional 50 billion yuan through 14-day reverse repos on Wednesday, traders said.

“The PBOC appears to be signaling to banks to move away from a reliance on short-term liquidity and head towards more longer-term liquidity,” wrote Jonas Short, Head of NSBO Policy Research in Beijing in a Wednesday note.

The major worry for policymakers, some analysts say, is that rising repo leverage and the over-reliance of smaller banks on short-term liquidity threatened asset price bubbles in the debt market, and added to systemic banking sector risks.

Indeed, Chinese debt has sold off over the past week as doubts on further broad-based monetary easing have risen and investors took profits following a sharp rally in onshore bonds, which pushed the ten-year Chinese treasury to seven-year lows in mid August.

The market reaction was swift, with the volume weighted seven-day rate, considered the best general indicator of liquidity in China trading at 2.50% by mid-afternoon Wednesday, up ten basis points (bps) from Tuesday’s closing average rate.

Analysts suggested small banks could bear the brunt if short-term liquidity remains tight.