Renminbi Gains Ground in Cross-border Investment
Chinese companies have shown increasing willingness to make cross-border renminbi transactions in recent years, with demand buoyed by expanding trade and investment. In the eight years since the launch of cross-border renminbi business, Chinese enterprises have been demonstrating a much greater appetite for the use of renminbi offshore.
More Chinese companies are moving out into the international market, making offshore investments. The "Belt and Road" initiative, which seeks to boost infrastructure construction in dozens of developing countries, has become a center of attention in the effort to give the renminbi a bigger role on the world stage. Making greater use of cross-border renminbi financial services to help the overseas investment of Chinese enterprises has also been seen as a new business opportunity for local banks.
The Start-up Years 2011—2015
In order to help domestic enterprises make use of renminbi settlements in their overseas direct investments, the People’s Bank of China in 2011 promulgated the Measures for the Pilot Program of Renminbi Settlement of Cross-border Transactions (PBOC Document No. 1, 2011). This made foreign investment possible using renminbi.
In November 2013, the third plenary session of the 18th Central Committee of the Communist Party of China was held, and the meeting called for “speeding up the transformation of government functions, deepening the reform of the investment system and establishing the dominant position of corporate investment.” In order to facilitate overseas investment by Chinese companies and simplify the approval process, the National Development and Reform Commission, the Ministry of Commerce, the State Administration of Foreign Exchange (SAFE) and the China Securities Regulatory Commission simplified their licensing requirements for overseas projects in a bid to encourage Chinese companies to take on a bigger role in the global market.
In March 2015, the National Development and Reform Commission, the Ministry of Foreign Affairs and the Ministry of Commerce jointly released their Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. In that same year, direct investments by Chinese enterprises in countries participating in the "Belt and Road" initiative increased 18.2% over the previous year.
In addition to the cross-border renminbi overseas direct investment policy, the "Belt and Road" initiative, the government's effort to decentralize authority and remove red tape, all contributed to this new demand for renminbi. In recent years, the value of renminbi overseas direct investment has shown rapid and sustained growth. More and more enterprises are choosing to make direct overseas investments in renminbi.
Renminbi Investment Boom
Since the second half of 2015, the renminbi has weakened against a strengthening US dollar. That has encouraged many more Chinese companies to seek opportunities overseas. According to the statistics of the Ministry of Commerce, Chinese investors made a total of 9,160 overseas direct investments in 164 countries and regions in 2016. The total value was 1.12992 trillion yuan, up 53.7% over the previous year. Most enterprises made foreign investment decisions as part of their overall development strategy, although a small number of companies took advantage of the convenient foreign investment examinations to transfer funds offshore under the name of foreign investment. That has had the potential to undermine the renminbi exchange rate and trigger large capital outflows.
As of the end of November 2016, the renminbi weakened to nearly seven to one US dollar. In order to stabilize capital outflows, prevent foreign investment risks and ensure sustained and healthy development of foreign investment, the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and SAFE jointly strengthened foreign investment management. At the same time, banks were required to strengthen their efforts to verify offshore investment projects and stem capital outflows. The focus was on those seen as making unusually large investments compared with their domestic business volume. These measures effectively eased the selling pressure on the renminbi and defended the currency's exchange rate. Although the volume of overseas investment by Chinese companies dropped sharply in the short term after the announcement of these measures, the combination of facilitating foreign investment and preventing risks will be conducive to the global plans of many Chinese enterprises.
Return to Rational Pattern
The government later unveiled its Circular of the General Office of the State Council on Transmitting and Issuing the Guiding Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the Ministry of Foreign Affairs on Further Guiding and Regulating the Direction of Overseas Investment (Document No. 74 of 2017 from the General Office of the State Council). This gave fresh direction to outbound investment, creating three broad categories -- encouraged, restricted and prohibited. It was also meant to provide some standardization for overseas investment and quantify risk. At the corporate level, investment decisions would become more rational due to greater familiarity with the risks associated with foreign investment.
Effective Investment Measures
Measure 1: China needs to meet the needs of domestic companies looking to use renminbi to boost their global presence. At the same time it must help these companies avoid exchange rate risks and save on financial costs.
One company which we will call Company A, for example, is an export-oriented enterprise in the petrochemical sector. It has invested in segments of the petrochemical production chain, including in Brunei, an oil producing country that is also a participant in the "Belt and Road" initiative. The company made the decision as part of its strategy of vertical integration, diversification and obtaining access to overseas crude oil supplies. The investment would also solve the shortage of domestic chemical raw materials and ease pressure from a shortage of available land, environmental protection problems and high levels of energy con