Back in January, Wenzhou seemed to be the lottery winner – given its status as the first city in China to relax rules permitting individuals to invest directly abroad.
The original offer, according to the Wenzhou Foreign Trade and Economic Cooperation Bureau, was that citizens could now invest much more overseas, up to a cap for individuals of $3 million on a single deal or $200 million in total each year.
There were some additional limits to the Wenzhou scheme, like a block on investing in overseas financial companies. But the news seemed to open up much wider investment horizons, as well as give heart to those who believe that China is moving more quickly than anticipated towards a more liberal stance on its capital account rules. (Previously – on paper at least – individuals have not been allowed to send foreign currency overseas, although locals travelling abroad were permitted to carry an equivalent of $50,000 a trip.)
So what happened next? Pretty much nothing it seems: not a single overseas deal hit the headlines in the weeks following the early January announcement. And then a round of confusion, with the scheme apparently suspended, after objections from SAFE, the foreign exchange regulator in Beijing.
That has got the domestic media speculating on whether the proposals have been delayed, cancelled or are just failing to spark investor interest. One potential explanation is that Wenzhou’s administrators never got the full range of approvals they needed from SAFE in Beijing. 21CN Business Herald thinks that this could well be a factor, and that the provincial authorities advanced further than they should have. Now SAFE is pulling them back into line.
Still, no investments had even been announced before the clampdown, which suggests that local interest may have been limited from the outset. One factor could be the ban on buying into financial enterprises (“what we are interested in is precisely the field of finance”, one local told 21CN). But more likely is that Wenzhou’s wealthy just aren’t too keen on exposing their investment strategies to official scrutiny.
That makes sense too. One of the reasons that Wenzhou is said to have been chosen for the pilot scheme is the huge amount of private capital that has accumulated in the city (estimated by various sources at somewhere between Rmb800 billion and Rmb1 trillion – i.e. as much as $150 billion). And anecdotal evidence says the locals have already found ways to channel plenty of this largesse overseas, usually without ticking too many official boxes.
21CN identifies different options, like borrowing the ID cards of relatives to accumulate overseas investment quotas. More complex, but better for moving larger sums, is transacting with offshore companies for delivery of foreign currency payment in exchange for a renminbi swap back at home. Wenzhou has various advantages here, with 500 companies already offshore and 800,000 natives working abroad, says the Financial Times.
Local authorities saw two advantages in the pilot. First it might drain funds out of the city’s huge underground banking system (see WiC63), as well as reduce upward pressures in the domestic asset classes that Wenzhou’s investors have sought to dominate (e.g. property). Second, it would allow bureaucrats to document better what the entrepreneurs were buying overseas.
But other Chinese will not necessarily lament that Wenzhou’s scheme has been slapped down – its inhabitants have a reputation as the nation’s brashest, and they can grate with compatriots. That was apparent in a second announcement towards the end of last month from sniffy Shanghai, on a similar scheme that it hopes to see approved in the first half of the year, according to Shanghai Securities News.
This time round, the newspaper reports, rather pointedly, city officials have been “communicating with the relevant authorities” on getting approvals for the proposed plan. The subtext: Wenzhou’s bumpkins may have made good in the past but Shanghai thinks of itself as the international financial centre of the future. That means it expects first dibs on any new overseas investment arrangements as and when they are announced.
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