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Home / Business / When China's trade war squeezes, it opens doors for foreign money

When China's trade war squeezes, it opens doors for foreign money



By Samuel Shen and Kevin Yao

SHANGHAI / BEIJING (Reuters) – As the Sino-US trade war drags, Beijing opens its door to wide gaps for foreign investors as concerns grow over falling exports, capital flight and persistent yuan weakness.

In the latest of a series of measures to order foreign capital, China on Tuesday scrapped the boundaries of two important inward investment schemes, even though two-thirds of existing allowances under the scheme remained unused. [19659003] Also reflecting desperation for overseas funding are the government's sunk charm offensives for the courts around the world, and a series of conferences targeting Fortune 500 companies are planned.

Probably the most notable success last year was when Tesla Inc < TSLA .O> achieved generous conditions to build the first foreign car plant in China.

"Stabilizing foreign investment will help stabilize the economy and it will have a direct impact on the exchange rate," a senior Chinese policy adviser told Reuters.

China's yuan currency fell below its central seven-dollar level last month to an 1

1-year low as trade frictions intensified. The currency has fallen over 5% since May.

Caring for global investors has become a priority for China since the outbreak of the devastating trade war last year. US companies in particular have been the focus of a drag match between Beijing and US President Donald Trump, which has urged US companies to leave China.

The adviser, who declined to be identified, brushed aside Trump's "pull-out" directive as "wishful thinking," arguing that foreign investors would be leaning toward China's huge market potential and vast consumer base. in both China's trade surplus and direct mainland investment from foreign companies shows why Beijing should invest in foreign money.

Higher tariffs and rising protectionism mean that China will benefit less and less dollars from trade, said Wang Peng, an economist at China Development Securities. "If you want to maintain a high level of investment in China, you need foreign influx."

China's external account and foreign exchange reserves: https://fingfx.thomsonreuters.com/gfx/mkt/12/5971/5905/ Pasted in 20Image.jpg

TWIN DEFICITS

It is an uphill battle.

Since China's entry into the World Trade Organization in 2001, foreign money has poured into the rapidly expanding export power plant, keeping the yuan on a continuous trend for more than ten years while inflating the country's foreign exchange reserves.

But that trend has changed, and China is now staring at potential deficits on both capital and operating accounts.

China's current account surplus, which mainly includes trade in goods and services, has shrunk every year since 2015, reaching a 15-year low of $ 49.1 billion (£ 39.73 billion) last year.

Cary Yeung, Head of Major Chinese Debt at Pictet Asset Management, said that it is natural for China to become a net importer of capital as it reduces economic dependence on exports, consumes more and therefore has a current account deficit.

"When that happens, the country will have to finance the deficit by borrowing more from abroad."

Conscious of this impending challenge, Beijing is doubling down on its efforts to lure portfolio inflows and open up the huge financial sector.

During the past month, senior Chinese officials met publicly, or privately, with visits from senior executives from at least four top US financial institutions. They include Citi Group chief Michael Corbat, BlackRock chairman Larry Fink and Fidelity International's Asia Pacific ex-Japan chief Rajeev Mittal.

Tuesday's scrapping of quotas on the two schemes – known as QFII and RQFII – is on top of drastic reforms that led global index publishers such as MSCI and FTSE Russell agreed to add China shares and bonds to his global benchmark portfolios.

However, the growth in the more widespread foreign investment ( FDI ) tended to be lower. Net FDI according to Nomura estimates, will more than halve this year to $ 40.3 billion.

Ben Cavender, Managing Director of Consultant China Market Research Group ( CMR ), said Although it will take time for large global companies to diversify part of their capacity out of China if the trade war drags on , probably smaller players will shut down China business.

"Every time you have government political frictions like this, it tends to slow down FDI and that's why I think that's the reality. The other reality is that the Chinese economy is slowing down, and so is The return on investment, "he said.

In another worrying sign, despite China's draconian capital controls, China's net errors and omissions – or not accounting capital outflows – rose near record levels of $ 87.8 billion in the first quarter. it as a sign that money is flowing illegally in ever-more "innovative" ways.

An increase in capital flight will put further downward pressure on the yuan and potentially trigger a vicious circle, although most economists see little risk of serious Latin American US-style balance of payments crisis in the world's second-largest economy.

Cheng Shi, chief economist at ICBC International, says that China's gigantic the other market is still a haven in the world of turbulence, with great potential in its consumer and new economy sectors.

"Therefore, long-term money, rather than leaving China, can double their efforts in the countryside amid short-term volatility."

(Reporting by Samuel Shen and Kevin Yao; Editing by Vidya Ranganathan and Simon Cameron-Moore) [19659030]
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