China has recently adopted its “Go Out” policy to stimulate Chinese entities to invest abroad.  This policy includes the adoption of new regulations which now allow Chinese entities freer access to foreign exchange currencies which can be used to invest abroad.  The policy will not only have a political impact upon the PRC in its dealing with other countries, it will greatly impact the ability of Chinese enterprises to invest in the United States. 

The People’s Republic of China is the largest foreign owner of U.S. Treasuries, holding approximately USD $ 763.5 billion.  By reducing its foreign exchange reserves through the loan or sale of US dollars to domestic companies, two significant benefits are realized.  First, the PRC reduces its risk of loss due to a devaluation of the US dollar; second, China’s economy is stimulated by allowing domestic businesses to invest abroad. These benefits have been made possible through two new rules issued by the PRC’s chief Forex regulator, the State Administration of Foreign Exchange (SAFE), and the Ministry of Commerce (MOFCOM).

On July 13, 2009, SAFE issued new regulations concerning the administration of foreign exchange relating to overseas investments made by Chinese entities. The Administrative Rules for the Foreign Exchange Administration of Domestic Entities’ Overseas Direct Investment relaxes government control over Chinese entities which invest abroad.  These new Rules expand capital facilities and funding sources to better able Chinese companies to finance outbound investment.  Under the old rules, Chinese entities were required to report all profits from overseas, including profits from currency exchanges, to SAFE and within 6 months of realization, and no such funds could be utilized without prior approval from SAFE.  Now, SAFE approval is no longer required so long as profits made overseas are used for the acquisition or establishment of overseas entities.  Such activities must be reported or registered with SAFE, however, which retains the right to approve or disapprove the receipt of foreign currency to be obtained through capital reduction, liquidation or transfer of stock.     

On March 16, 2009, MOFCOM issued the Measures for the Administration of Outbound Investment (2009 Outbound Investment Measures) (“Measures”), which took effect May 1, 2009; the Measures are designed to ease and expedite approvals for Chinese companies investing abroad.  Loan processing time will be reduced and approval will be made by different levels of MOFCOM, depending upon the amount and kind of loan. 

Loans in excess of USD $ 100 million and falling in certain categories enumerated by MOFCOM will require MOFCOM national level approval.  Loans greater than USD $10 million and less than USD $100 million will require MOFCOM approval at the provincial level.  Outbound investments under USD $10 million, can be made under loans from provincial MOFCOM, with approval made within 3 business days of application.  MOFCOM estimates that investors whose projects are less than USD $10 million comprise about 85% of all its applicants.  

The full impact of the new regulations is unknown at the present time.  The success will depend upon their implementation.  What is clear is that China’s huge U.S. dollar foreign exchange reserve combined with a struggling U.S. economy will result in more Chinese outbound investments being made in the U.S.