One of the most critical forces driving China’s market-oriented reforms is the further easing of foreign investment thresholds. Despite heavy state control in many key industries, the country’s economic rebalancing plan allows market forces to efficiently allocate resources and invites more foreign investment into China’s economy.
Additionally, as the central government moves forward with the internationalization of the renminbi (RMB), multinationals can establish enhanced treasury functions in China to gain greater visibility, control and flexibility over onshore and offshore renminbi-denominated cash flows.
Further Liberalization on Foreign Investment Thresholds
Online marketplaces in China were recently liberalized as the government relaxed its previous joint-venture requirement, enabling multinationals to expand market share via e-commerce. With this reform, wholly foreign-owned e-commerce companies are now permitted to operate in the Shanghai Free Trade Zone.
China’s newly proposed foreign investment law also provides legal protection for the variable interest entity (VIE), a corporate structure used by many multinational corporations, especially technology companies, to circumvent strict foreign ownership restrictions by providing financing for fully Chinese-owned companies, which then sign contracts granting all related rights to the foreign investors.
The deposit insurance program planned for 2015, which will cover 99.6% of depositors, is also a key step toward freeing up China’s financial sector. China’s ongoing efforts to open its economy will offer enormous growth opportunities for multinationals in the coming years.
Rapid Progress on Internationalization of the Renminbi
In November 2014, the renminbi became one of the top five world payment currencies, with a 321 percent increase in value of payments during the previous two years. The Shanghai Free Trade Zone and the Shanghai and Hong Kong Stock Exchange Connect are both significant internationalization initiatives intended to encourage multinationals to establish global headquarters with full treasury functions in Shanghai and to settle more trade in renminbi. Three new free trade zones will soon be launched in Guangdong, Fujian and Tianjin. This will further lessen constraints on foreign investment and encourage more trade settlement in renminbi.
(Sources: Frontier Strategy Group analysis; SWIFT RMB Monthly Tracker; Standard Chartered Research)
As the government develops new infrastructure to boost spending, a stronger yuan will help to encourage domestic consumption and will strengthen efforts to internationalize the renminbi, despite downward pressure. The yuan is likely to experience two-way fluctuations against the U.S. dollar in 2015. Over a longer period of time, appreciation of the renminbi will force low-end domestic exporters to move up the value chain and will help to further accelerate rebalancing reforms. Multinationals will also benefit as more global transactions are settled in renminbi.
Preparing Multinationals for China’s New Normal through 2020
This blog post is the second of a six-part FSG Insight series on China’s economic outlook in the next five to six years and its implications for multinationals’ mid-term strategies. During the next few weeks, I will elaborate on some of the key opportunities and risks that multinationals will need to monitor as they develop their strategic positions in China through 2020. Next week’s update: “Fragile China: How Financial Volatility Can Disrupt Economic Growth.”